Two Countries Are Identical in All Respects Except That Country

Two countries are identical in all respects except that country A's rate of growth of the domestic money supply (MG) is 33 percent, while country B's MG is 25 percent, and country A's variance of export revenue (VAREX) is 3.75 percent, while country B's VAREX is 10 percent. Based only on these two variables, which country possesses the most sovereign country risk?

A) Country A because the higher rate of money supply growth is insufficient to overcome the impact of a lower export revenue variance on country risk exposure.
B) Country B because the higher rate of money supply growth has less impact on country risk exposure than the impact of a lower export revenue variance.
C) Country A because the higher rate of money supply growth is sufficient to overcome the impact of a higher export revenue variance on country risk exposure.
D) Country B because the higher rate of money supply growth has a positive impact on country risk that outweighs the impact of a lower export revenue variance.
E) They both have the same sovereign country risk exposure.

Correct Answer:

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