Answer to Question #50524 in Microeconomics for nidhi

Question

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.

Answer 1

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.