The GDPs of two emerging economies (A andB) are equal, but GDP in country B is less volatile than GDP in country A. Both have borrowed $25 billion that must be repaid next year. Which of the following is correct in terms of the probabilities of default?
A) Both A and B have the same probability of default.
B) A's probability of default is higher than B's probability of default.
C) B's probability of default is higher than A's probability of default.
D) Based on probability, B will default.

Question

Quizplus · Accepted Answer

The fact that country B's GDP is less volatile suggests that it has a more stable economy and is better able to handle debt repayment. Therefore, B's probability of default is lower than A's probability of default.

The GDPs of Two Emerging Economies (A AndB) Are Equal