I got it wrong too. But like many questions here, the answer depends on knowing the many inconsistencies and strange rules in SQL Server - most of which you never need to know.
I had no idea how long char and varchar default sizes are, for the simple reason that I've never declared any without specifying the length. IMHO the correct answer should have been 'Syntax Error'!
It would be nice to have a datatype like .NET's string which can carry strings of (almost) any length without worrying about what its contents' maximum length might happen to be. Fields in database tables may need to be specified precisely; local variables should not.