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      Question

      The Impossible Trinity (or Trilemma) in international

      finance states that a country cannot simultaneously have:
      A Fixed exchange rates, free capital flows, and fiscal autonomy. Correct Answer Incorrect Answer
      B Fixed exchange rates, free capital flows, and an independent monetary policy. Correct Answer Incorrect Answer
      C Floating exchange rates, capital controls, and trade surplus. Correct Answer Incorrect Answer
      D Full employment, price stability, and current account balance. Correct Answer Incorrect Answer
      E Independent monetary policy, fiscal policy, and exchange rate policy. Correct Answer Incorrect Answer

      Solution

      The Trilemma states that only two of the following three are possible: 1) Fixed Exchange Rate, 2) Free Capital Mobility, and 3) Independent Monetary Policy. For example, to maintain a fixed exchange rate with open capital flows, domestic interest rates must align with world rates, sacrificing monetary independence.

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