n is a loss of area n because the taxes prevent some previously profitable lending from occurring. America’s government collects tax revenues equal to area k, but this is effectively paid by American borrowers who must pay a higher interest rate on their foreign borrowing. effect on America is a loss of area j because of the decline in international borrowing.Р8. a.?The increase in the interest rate rotates the line showing the debt service due, which is also the benefit from not repaying, upward to (1 + i¢)D from (1 + i)D. The threshold amount of debt beyond which the country’s government should default declines to Dlim¢ from Dlim. This change can lead to default, even if the country’s government would not default before the change, if the actual amount of debt is between Dlim¢ and Dlim.
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