Mexico suffered from capital flight in 1994. What happened to Mexico's real interest rate and the peso?
A) The real interest rate fell, and the peso appreciated.
B) The real interest rate fell, and the peso depreciated.
C) The real interest rate rose, and the peso appreciated.
D) The real interest rate rose, and the peso depreciated.

Question

Quizplus · Accepted Answer

Capital flight from Mexico in 1994 would have led to a decrease in demand for the peso, causing it to depreciate. To counteract the capital flight and stabilize the currency, the central bank would likely increase interest rates, thus the real interest rate would rise.

Mexico Suffered from Capital Flight in 1994