Which of the following is impossible for a country to choose simultaneously? Que

Question

Which of the following is impossible for a country to choose simultaneously?

Question 17 options:

fixed exchange rate, free capital flows, and an independent monetary policy

flexible exchange rate, free capital flows, and an independent monetary policy

fixed exchange rate, capital controls, and an independent monetary policy

fixed exchange rate, free capital flows, and a monetary policy subject to keeping the exchange rate unchanged

fixed exchange rate, free capital flows, and an independent monetary policy

flexible exchange rate, free capital flows, and an independent monetary policy

fixed exchange rate, capital controls, and an independent monetary policy

fixed exchange rate, free capital flows, and a monetary policy subject to keeping the exchange rate unchanged

Explanation / Answer

Correct option is (2).

As per the theorem of Impossible Trinity, a country cannot simultaneously choose all three of: Flexible exchange rate, free capital flows and independent monetary policy. If any two of these policy measures are chosen, the third has to be sacrificed.

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