In the Two-Period Model with Default, Default Will Occur When

question 58

Multiple Choice

In the two-period model with default, default will occur when

• A) the government debt is larger than the total taxes.
• B) the government surplus is smaller than national income.
• C) the government debt is smaller than the discounted value of the future penalty from defaulting.
• D) the government debt is larger than the discounted value of the future penalty from defaulting.
• E) the government surplus is smaller than the discounted value of the future penalty from defaulting.

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Definitions:

Risk-Free Rate

The theoretical rate of return on an investment with no risk of financial loss, often represented by the yield on government securities.

Future Exchange Rate

Future Exchange Rate is the anticipated value of one currency in terms of another currency at a specified date in the future, often determined through futures contracts.

British Securities

Stocks, bonds, or other financial instruments issued by companies or the government in the United Kingdom.

Total Return

The overall earnings on an investment, including both capital gains and income, over a specific time period.