In 2002 and again in 2014, the Argentinean government defaulted on its debt. Which statement is consistent with what the open-economy macroeconomic model predicts?
A) This event should have raised Argentinean interest rates and caused the Argentinean currency to appreciate.
B) This event should have raised Argentinean interest rates and caused the Argentinean currency to depreciate.
C) This event should have lowered Argentinean interest rates and caused the Argentinean currency to appreciate.
D) This event should have lowered Argentinean interest rates and caused the Argentinean currency to depreciate.

Question

Quizplus · Accepted Answer

According to the open-economy macroeconomic model, a default on debt would increase the riskiness of investing in the country, which would cause foreign investors to demand a higher return on their investments. This increased demand for returns would lead to higher interest rates in the country. Additionally, the default would cause a decrease in demand for the Argentinean currency, causing it to depreciate.

In 2002 and Again in 2014, the Argentinean Government Defaulted