Consider the graph in the box The Special Case of Sovereign Debt

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QUESTION:

Consider the graph in the box “The Special Case of Sovereign Debt.”

a. Show graphically the effect of an increase in the interest rate (i). If the country’s government would not default before this change, could this change lead to default?

b. Show graphically the effect of an increase in the cost of defaulting. If the country’s government would not default before this change, could this change lead to default?


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