An Emerging Economy as a Current GDP of $100 Billion

question 78

Multiple Choice

An emerging economy as a current GDP of $100 billion. It borrows $20 billion at a real interest rate of 5%, which it will repay next year. The costs of default are 25% of GDP. Suppose that the country's GDP falls to $80 billion next year. Which of the following is a correct assumption?

• A) It will repay the loan.
• B) It will default on the loan.
• C) It will be indifferent toward repaying or defaulting on the loan.
• D) Not enough information is provided to answer the question.

---

Definitions:

Compounded Semi-Annually

An interest calculation method where interest is added to the principal sum of a deposit or loan at mid-year and end-of-year, resulting in interest earning interest.

Guaranteed Contract

An agreement ensuring certain terms are fulfilled, often used in the context of employment contracts guaranteeing payment.

Rate of Return

The gain or loss of an investment over a specified period, expressed as a percentage of the investment's initial cost.

Compounded Monthly

Interest calculation method where interest is added to the principal sum at the end of each month, leading to interest on interest.