Suppose an Emerging Economy Has a Current GDP of $100

question 91

Essay

Suppose an emerging economy has a current GDP of $100 billion. Of this GDP, consumption is 50% of it. The country borrows $20 billion at a real interest rate of 5%, which it will repay next year. The costs of default are 25% of GDP. Will it repay or default on the loan? Explain.

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Definitions:

Price Elasticity

A measure of the responsiveness of the quantity demanded or supplied of a good to a change in its price.

Demand Function

An equation that describes the quantity of a good or service demanded at different prices.

Utility

The satisfaction or pleasure that a consumer derives from consuming a good or service.

Income

The total amount of money received by an individual or generated by an entity, typically on a regular basis, from various sources such as wages, investments, or business ventures.