Figure 14-7 -Refer to Figure 14-7. Which of the following is consistent with capital flight from Mexico? A) The real exchange rate of the peso appreciates from E₀ to E₁. B) The real exchange rate of the peso depreciates from E₀ to E₁. C) The real exchange rate of the peso appreciates from E₁ to E₀. D) The real exchange rate of the peso depreciates from E₁ to E₀.

Question

Quizplus · Accepted Answer

Capital flight, or the movement of large amounts of capital out of a country, can lead to a depreciation of its currency. This is because when investors sell their assets in a country and move their funds elsewhere, there is a decrease in demand for that currency, which lowers its value. Therefore, if the real exchange rate of the peso depreciates from E₁ to E₀, it is consistent with capital flight from Mexico.

Figure 14-7 -Refer to Figure 14-7. Which of the Following Is Consistent