If a nation has default costs (punishment costs) = c, as a percent of GDP, every extra dollar paid toward the debt is equivalent to:
A) a dollar's saving in interest over time.
B) giving more income to the creditors.
C) a loss of consumption of (1 - c) dollars.
D) raising the burden of the debt by 1/(1 - c) dollars.

Question

Quizplus · Accepted Answer

Paying extra towards the debt reduces the nation's consumption by the amount paid minus the default costs saved, which is represented as a loss of consumption of (1 - c) dollars.

If a Nation Has Default Costs (Punishment Costs) = C