Mexico’s Balance of Payments Crisis (1991–1995)​

What Happened? (1991–1995)

100

What was the current account deficit as a % of GDP in 1994?
A. 2%
B. 4%
C. 6.7%
D. 9%

✅ Correct Answer: C. 6.7%

200

What happened to Mexico’s foreign reserves between January and December 1994?
A. Stayed constant
B. Rose from $6B to $30B
C. Fell from $30B to below $6B
D. Were unaffected by the crisis

✅ Correct Answer: C. Fell from $30B to below $6B

300

What happened to the peso’s value after the crawling peg was abandoned in December 1994?
A. It stabilized
B. It strengthened
C. It doubled in value
D. It rapidly depreciated

✅ Correct Answer: D. It rapidly depreciated (from 3.4 → 7.2 MXN/USD)

400

What type of capital inflows did Mexico rely on during the early 1990s?
A. Foreign Direct Investment (FDI)
B. Export earnings
C. Short-term portfolio inflows
D. Tax revenue

✅ Correct Answer: C. Short-term portfolio inflows

500

What financial instrument caused a rollover risk of over $27 billion in late 1994?
A. Bonds linked to inflation
B. Dollar-indexed tesobonos
C. Treasury bills
D. Floating rate notes

✅ Correct Answer: B. Dollar-indexed tesobonos

Causes Before the Devaluation

100

What did the fixed exchange rate do to the peso?
A. Made it undervalued
B. Kept it stable
C. Made it overvalued
D. Had no impact

✅ Correct Answer: C. Made it overvalued

200

Which of the following best describes Mexico’s financial regulation in the early 1990s?
A. Strict and well-enforced
B. Moderate and transparent
C. Weak and poorly supervised
D. Nonexistent

✅ Correct Answer: C. Weak and poorly supervised

300

Which political issue triggered investor panic in 1994?
A. NAFTA negotiations
B. Political assassinations
C. Tax increases
D. Banking union

✅ Correct Answer: B. Political assassinations

400

Why was there a currency mismatch risk with tesobonos?
A. They were payable in pesos
B. Investors demanded gold instead
C. They were indexed to the US dollar
D. They were not publicly traded

✅ Correct Answer: C. They were indexed to the US dollar

500

What was a key reason why the current account deficit was unsustainable?
A. Too much gold export
B. Declining oil prices
C. Lack of long-term FDI and weak exports
D. High tax revenue

✅ Correct Answer: C. Lack of long-term FDI and weak exports

Policy Mistakes and Alternatives

100

Which policy could have reduced pressure on reserves before the crisis?
A. Fixed peg
B. More dollar-indexed bonds
C. Flexible exchange rate
D. Trade embargo

✅ Correct Answer: C. Flexible exchange rate

200

What was NOT done in response to falling reserves?
A. Interest rate hike
B. Reserve depletion
C. Devaluation
D. Central bank intervention

✅ Correct Answer: A. Interest rate hike

300

What kind of capital should Mexico have promoted instead of short-term inflows?
A. Portfolio investment
B. Military spending
C. Foreign Direct Investment
D. Cryptocurrency

✅ Correct Answer: C. Foreign Direct Investment

400

Which reform could have helped reduce external borrowing dependence?
A. Reducing tariffs
B. Structural reforms and fiscal discipline
C. Printing more money
D. Lowering wages

✅ Correct Answer: B. Structural reforms and fiscal discipline

500

How could policymakers have maintained investor confidence during political turmoil?
A. Announce a tax cut
B. Restrict exports
C. Increase secrecy
D. Communicate transparently

✅ Correct Answer: D. Communicate transparently

Lessons for Developing Countries

100

Which of the following is a key lesson from Mexico’s crisis?
A. Peg your currency at all costs
B. Rely on short-term debt
C. Maintain flexible exchange rates
D. Avoid IMF involvement

✅ Correct Answer: C. Maintain flexible exchange rates

200

Developing countries should avoid overreliance on:
A. Tourism revenue
B. Short-term capital inflows
C. Trade with neighbors
D. Government spending

✅ Correct Answer: B. Short-term capital inflows

300

Which of the following helps sustain investor confidence?
A. Political and economic transparency
B. Capital controls
C. Low taxes
D. Currency devaluation

✅ Correct Answer: A. Political and economic transparency

400

Why is building strong institutions important?
A. To create more debt
B. To reduce imports
C. To monitor BOP and detect vulnerabilities
D. To attract tourism

✅ Correct Answer: C. To monitor BOP and detect vulnerabilities

500

What did Mexico's shallow export base reveal despite trade openness?
A. High wages
B. Strong institutions
C. Fragile fundamentals
D. Capital surplus

✅ Correct Answer: C. Fragile fundamentals