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

question 15

Multiple Choice

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.

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Definitions:

Variable Cost

A cost that changes in proportion to the level of activity or volume of output in a business.

Capacity

In finance, the ability of an individual or organization to repay a loan or meet financial obligations.

Fixed Costs

Costs that do not vary with the volume of production or sales, such as rent, salaries, and insurance.

Selling Price

The fixed or negotiated amount at which a product or service is sold to customers.