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An Increase in the Volatility of GDP Increases the Probability

Question 116

Multiple Choice

An increase in the volatility of GDP increases the probability of default because:


A) it increases political tension and there is a big turnover in government officials who don't know how to run the financial system.
B) automatic stabilizers kick in and increase spending when GDP is lower, taking money away from repaying debt.
C) tax receipts are erratic and government is not good at coming up with payments when they are due.
D) there is still only one potential real GDP level but many more possibilities below potential real GDP, thus a higher likelihood of default.

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