A higher lending rate or an increase in debt principal increases the probability of default because:
A) creditors get more anxious to get repaid and therefore drive debtors into bankruptcy.
B) the nation's repayment/default threshold is higher because the consumption level after repayment of principal and interest falls, whereas the default cost did not change.
C) the bankers of the nation will not help because they can make more profitable loans to third-party borrowers.
D) the government is adverse to repaying a debt that has existed for more than five years.

Question

Quizplus · Accepted Answer

An increase in the lending rate or debt principal raises the repayment/default threshold because it reduces the level of consumption after repaying principal and interest, without altering the cost of default. This makes default more likely as the economic burden of repayment becomes heavier relative to the consequences of defaulting.

A Higher Lending Rate or an Increase in Debt Principal