When 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

During capital flight, investors sell off their assets and withdraw their funds from a country, typically causing its currency to depreciate. To counteract this, Mexico would have had to raise its interest rates to try to keep investors in the country. Therefore, the real interest rate would have risen. However, this rise in interest rates would likely have further hurt the economy, causing the peso to depreciate even more. So, the correct answer is D: the real interest rate rose and the peso depreciated.

When Mexico Suffered from Capital Flight in 1994, What Happened