Ceteris paribus, if the volatility of an emerging market economy's GDP increases:
A) it will not be able to borrow as much as before at the world interest rate on risk-free debt.
B) it will be able to borrow more than before at the world interest rate on risk-free debt.
C) it can borrow the same amount as before at the world interest rate on risk-free debt.
D) its risk premium falls.

Question

Quizplus · Accepted Answer

If the volatility of an emerging market economy's GDP increases, investors will see it as a riskier investment and demand a higher interest rate in return for lending to them. As a result, the country will not be able to borrow as much as before at the world interest rate on risk-free debt.

Ceteris Paribus, If the Volatility of an Emerging Market Economy's