When GDP Volatility Increases, It Changes the Equilibrium in the Credit

question 134

Multiple Choice

When GDP volatility increases, it changes the equilibrium in the credit market for sovereign borrowers. How?

• A) Volatility increases the probability that a nation will repay and decreases the need to borrow, so the equilibrium debt level and interest rates drop.
• B) Volatility decreases the probability that a nation will repay and increases the need to borrow, so the equilibrium debt level is indeterminate and interest rates rise.
• C) Volatility decreases the probability that a nation will repay and decreases the need to borrow, so the amount of debt level will fall and interest rates drop.
• D) Volatility increases the probability that a nation will repay and increases the need to borrow, so the amount of debt level and interest rates rise.