Answer to Question #50524 in Microeconomics for nidhi

Question #50524
An economy with fixed exchange rate cannot maintain an independent monetary policy. Do you agree with the above statement? Substantiate your answer with appropriate diagrams.
1
Expert's answer
2015-01-26T12:02:02-0500
The Impossible trinity (also known as the Trilemma) is a trilemma in international economics which states that it is impossible to have all
three of the following at the same time:
- A fixed exchange rate
- Free capital movement (absence of capital controls)
- An independent monetary policy
It is both a hypothesis based on the uncovered interest rate parity
condition, and a finding from empirical studies where governments that
have tried to simultaneously pursue all three goals have failed.
So, this statement is true.

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