If a nation's leaders make rational decisions, they would weigh the costs and benefits of defaulting on the debt as follows if the:
A) borrowing costs are greater than the repayment costs, the borrower will not default.
B) nation's consumption after repayment of principal and interest exceed the consumption available after default costs are deducted, the nation will repay.
C) nation can borrow from other lenders more cheaply, it will simply refinance and deal with the problem later.
D) nation can sell off assets and increase the workweek to export more, it will definitely repay.

Question

Quizplus · Accepted Answer

Option B is the best choice because it considers the cost-benefit analysis in a practical way. It takes into account the available consumption after repayment and the consumption that will be available after the default costs are deducted. This approach helps in understanding that repaying the debt is a better option when compared to defaulting, as it may lead to reduced consumption and damage to the creditworthiness of the nation. Options A, C, and D do not provide a complete analysis of the cost-benefit of defaulting, and they do not take into account the broader socioeconomic implications of such a decision.

If a Nation's Leaders Make Rational Decisions, They Would Weigh