In a two-period model with default, the nation defaults on its debt in the current period if

Question

Quizplus · Accepted Answer

In a two-period model with default, the nation defaults on its debt in the current period if the market interest rate is high (making it difficult to repay the debt), the cost of defaulting is low (i.e., the consequences are not severe), and national debt is high (the debt burden is already high). Therefore, choice A is the best answer as it satisfies all three conditions. B, C, and D are incorrect as they do not satisfy all three conditions. E is irrelevant to the question.

In a Two-Period Model with Default, the Nation Defaults on Its