In the two-period model with default, default can be prevented because

Question

Quizplus · Accepted Answer

In the two-period model with default, default can be prevented if it is too costly for the country. This is because default can lead to a loss of reputation, exclusion from international markets, and higher borrowing costs in the future. Therefore, a country may choose not to default even if it is facing financial difficulties. Collateral (A) can mitigate the losses in case of default but does not prevent it. No one lending (B), government making it illegal (E), and not wanting to reveal bad borrowing (D) may deter default to some extent, but they are not as effective as the cost of default being prohibitively high.

In the Two-Period Model with Default, Default Can Be Prevented