Answer to Question #64214 in Macroeconomics for Teresa

Question #64214
Assume that risk neutral investors decide whether to invest in a risk-free bond with interest rate i0 or a government bond with default risk. With probability ω investors lose their investment in the government bond (including the interest payment). With probability 1 − ω investors receive interest rate i. Mark the correct statements. In addition, suppose that the default risk of the government bond is increasing in the interest rate as follows: ω = ω0 + βi. 5. Assume that ω0 = 0, β = 1 and i0 = 0. Mark the correct statements. (a) There are multiple equilibrium interest rates i for government-bonds. (b) There are exactly two equilibrium interest rates i. (c) There is a unique equilibrium interest rate i = 0%. (d) There is a unique equilibrium interest rate i = 100%. (e) There are two equilibria: i = 0 % and i = 100 %.
Expert's answer
The correct statements of all statements is (e) that there are two equilibria: i = 0 % and i = 100 %.

Need a fast expert's response?

Submit order

and get a quick answer at the best price

for any assignment or question with DETAILED EXPLANATIONS!


Assignment Expert
19.12.16, 17:50

Dear Teresa, obviously answer b) isn't correct since it states only one equilibrium rate.

18.12.16, 01:38

How do you get 0 and 100% .. And wouldnt be b) also then correct??

Leave a comment

Ask Your question

New on Blog