Question

Question 3

Explain the concept of “The Impossible Trinity”. Use the case of expansionary monetary policy to illustrate your answer. (20%)

Answer 1

The Impossible Trinity is a term in the monetary dynamic hypothesis. In contrast to a difficulty, which has two arrangements, an Impossible Trinity offers three equivalent answers for an intricate issue. An Impossible Trinity recommends that nations have three choices from which to pick when settling on central choices about dealing with their universal fiscal approach understandings. This hypothesis uncovered the unsteadiness characteristic in utilizing the three essential alternatives accessible to a nation when setting up and observing its worldwide financial arrangement understandings.

The Impossible Trinity is a financial hypothesis, which sets that nations may look over three alternatives when settling on key choices about their worldwide money related strategy understandings.

Nonetheless, just a single alternative of the Impossible Trinity is attainable at a given time, as the three choices of the Impossible Trinity are fundamentally unrelated.

Today, most nations favor free progression of capital and self-ruling money related approaches.

Expansionary money related strategy

To comprehend this idea, let us expect an economy follows a fixed conversion scale system and permits free capital developments. Further, expect that the nation's national bank chooses to follow an expansionary money related arrangement — through bringing down loan fees.

Note that the expansionary money related strategy is by and large embraced to invigorate financial movement. At the point when loan fees are lower, speculators haul their cash out of that nation and put resources into the nations that give generally better yields. During such capital outpourings, the flexibility of household cash comparative with remote money builds, which brings about a deterioration of the nearby money.

Notwithstanding, under a fixed swapping scale, the estimation of local money is fixed by the national bank and can't change concerning another.

In this manner, the national bank, in the quest for balancing the abundance gracefully of household cash, makes a fake interest by purchasing its own local resources and monetary standards. Since loan cost and cash gracefully are contrarily related, engrossing cash and resources out of the economy pulls the financing costs higher