Consider an economy with an external debt of D=80. Assume the economy's capacity to honor its debt is state-dependent. Specifically, suppose there are two states: good and bad. In the good state the economy can pay its debt in full. In the bad state it can pay at most 20. The probability of the bad state is given by 7(D)= min {1,0.01D} a. Calculate the value of the economy's external debt on the secondary market. b. Would it be in creditors' collective best interest to forgive 10 units of debt? c. Calculate the maximum amount of debt forgiveness that would be in creditors' collective best interest.

Consider an economy with an external debt of D=80. Assume the economy's capacity to honor its debt is state-dependent. Specifically, suppose there are two states: good and bad. In the good state the economy can pay its debt in full. In the bad state it can pay at most 20. The probability of the bad state is given by 7(D)= min {1,0.01D} a. Calculate the value of the economy's external debt on the secondary market. b. Would it be in creditors' collective best interest to forgive 10 units of debt? c. Calculate the maximum amount of debt forgiveness that would be in creditors' collective best interest.

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter11: Fiscal Policy And The Federal Budget

Section: Chapter Questions

Problem 16QP

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