An Emerging Economy as a Current GDP of $100 Billion

question 1

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 rises to $110 billion next year. What will be the value of its consumption if it defaults on the loan?

• A) $75 billion
• B) $82.5 billion
• C) $89 billion
• D) $110 billion

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