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

Question

Quizplus · Accepted Answer

According to the two-period model with default, a nation defaults on its debt in the current period if the market interest rate is high, the cost of defaulting is low, and national debt is high. This is because a high interest rate makes it more difficult to repay the debt, while a low cost of defaulting means that the consequences of defaulting are not severe enough to discourage the nation from defaulting. Lastly, a high level of national debt means that the nation is already facing financial difficulties which make it more likely to default. Therefore, option A is the correct answer.

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