In the two-period model with default, default will occur when
A) the government debt is larger than the discounted value of the future penalty from defaulting.
B) the government debt is smaller than the discounted value of the future penalty from defaulting.
C) the government surplus is smaller than the discounted value of the future penalty from defaulting.
D) the government surplus is smaller than national income.
E) the government debt is larger than the total taxes.
Correct Answer:
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