In 2002 it looked like the Argentinean government might default on its debt (which eventually it did). The open-economy macroeconomic model predicts that this should have
A)raised Argentinean real interest rates and caused the Argentinean currency to appreciate.
B)raised Argentinean real interest rates and caused the Argentinean currency to depreciate.
C)lowered Argentinean real interest rates and caused the Argentinean currency to appreciate.
D)lowered Argentinean real interest rates and caused the Argentinean currency to depreciate.

Question

Quizplus · Accepted Answer

The open-economy macroeconomic model predicts that a potential government default would raise real interest rates due to increased risk, leading investors to demand higher returns for holding government debt. This situation would also likely cause the national currency to depreciate as investors lose confidence in the country's financial stability and move their assets to safer currencies.

In 2002 It Looked Like the Argentinean Government Might Default