Golden Island is a flourishing country because of tourism. The island is governed by a Governor General, a parliamentary body of elected legislators, and a couple of agencies to regulate the island's economic and social environment. Recently, prospectors in the mountain range bordering the southern coast of the island discovered large deposits of gold, silver, and platinum. The government is concerned that development of these deposits will harm the tourist trade. Elena Trippi has been asked to participate in a series of fact-finding sessions conducted jointly by the island's ministries of finance and tourism. This blue-ribbon fact-finding committee has been meeting weekly for the past two months.

Trippi began a recent meeting of the committee by presenting a summary of Golden Island's current financial and economic conditions. Comparing Golden Island with other developing nations, she presents these conditions in Exhibit 1.

Exhibit 1: Current Financial and Economic ConditionsRelative to other developing nations, Golden Island1. has a relatively low level of capital per worker.2. does not have competitive financial markets. The island's single commercial bank also acts as the central bankof Golden Island.3. has a relatively low rate of savings and investment.4. has a low level of literacy (about half the population is illiterate).5. has well-established property rights.6. tightly regulates capital flows into and out of the economy.Trippi states that these conditions do not necessarily cause great harm to the tourist industry. But the mining and processing of gold, silver, and platinum will require re-examination of economic policies and circumstances. In particular, Trippi is concerned about the issue of tariffs because Golden Island has relatively high tariffs on capital goods.

Trippi states:

Golden Island will benefit from continuing to protect domestic capital goods by maintaining its relatively high tariff on non-domestic capital goods. High tariffs have little impact on foreign direct investment (FDI), and they generate revenue for the government.

Rishi Chatterjee is Golden Island's Interim Deputy Minister for Tourism. He states that he is not very knowledgeable about the gold business but believes that developing the island's gold deposits will affect the relative value of its currency, the sona (Sn). The current exchange rate of the sona against the US dollar is Sn8.50/USD. Chatterjee states that increased FDI will cause the sona to strengthen against world currencies. Tourism will be harmed because goods and services priced in sonas will appear more expensive to the non-domestic visitors who make up the bulk of the tourist trade.Trippi shows the committee Exhibit 2, which contains data from the currency exchange markets relative to the sona. On the basis of this data, Trippi states that markets currently anticipate that the sona will weaken, not strengthen, against both the dollar and the British pound.

Exhibit 2: Exchange Rates, Interest Rates, and Inflation RatesOne-YearOne-YearCurrent Spot RatesInterest Rate (%)Inflation Rate(%)Golden IslandSn8.50/USD6.53United KingdomGBP0.62/USD4.051.6United States3.51.3Golden Island's Minister of Finance and president of the Central Bank is Rajiv Sengupta. He is confident that Golden Island can allow the mining district to proceed with little or no damage to tourism. He states:We can use free market mechanisms to control potential pollution from the mines. Because there will be at least 4, and possibly more than 10, mining companies operating in the mining district, we can design an exchange wherein the companies can trade "pollution rights." The government will set the total maximum amount of various pollutants that might occur from mining operations, revising that total from time to time. The companies will bid on rights that will allow them a certain level of that total pollution. If a company exceeds the level to which it has a "right" , it will be fined. By allowing the trading of these rights on an exchange, the resulting "price of pollution" will reflect the most efficient allocation of resources related to the mining district.

Sengupta addresses the issues of potential inflation as the island transitions to greater growth. He assures the committee that Golden Island's central bank stands ready to use monetary tools to prevent such inflation.

1.How many of the current financial and economic conditions listed in Exhibit 1 at least partially explain why Golden Island faces limited economic growth?B

C

A

A. All six are limitations on growth.

B. Exactly five of the six are limitations on growth.

C. Exactly three of the six are limitations on growth.