When a country's central government is at risk of defaulting on its debt, lenders perceive higher risks and demand higher interest rates as compensation. This results in:
* Anincrease in interest ratesfor borrowing by all entities in the country.
* OptionsA and Bare incorrect because exchange rates usually decline (currency devalues) when default risk rises.
* D. Decrease in interest ratesis the opposite of what happens in such scenarios.
References:Volume 1, Chapter 4 ("Sovereign Risk and Interest Rates").