Question

    The Impossible Trinity (also called Trilemma, or Unholy

    Trinity) is a concept in international economics which states that it is impossible to have all three of the following at the same time. Which of the following are NOT included in that? Please select the appropriate option. i. Independent monetary policy ii. Fixed foreign exchange rate iii. Low inflation iv. Free capital flow v. Strong regulatory mechanism
    A Only iii and v Correct Answer Incorrect Answer
    B Only iii and iv Correct Answer Incorrect Answer
    C Only iii Correct Answer Incorrect Answer
    D Only v Correct Answer Incorrect Answer
    E Only ii and v Correct Answer Incorrect Answer

    Solution

    The Impossible Trinity or "The Trilemma", in which two policy positions are possible. Out of the three, if a nation goes for two things then doing the third thing becomes impossible. For example, if the interest rate is high in an economy and there is free capital flow more money will come from abroad to take benefit of high interests. The increase inflow of foreign money will increase the demand for domestic currency and the price of domestic currency will increase. Thus, exchange rates will not remain fixed.

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