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:

Principal

The main party to a transaction, contract, or financial instrument, or the amount of a debt or investment before interest.

Interest

The cost of borrowing money, typically expressed as an annual percentage of the principal, or the profit earned on savings and investments.

Negotiable Instrument

A written document guaranteeing the payment of a specific amount of money, either on demand or at a set time, with the payee able to transfer it to another holder.

Good Contract

An agreement that is valid under the law and contains all the essential elements making it enforceable and binding.