Question

Fixed Exchange Rates and the Trilemma.

what do you find most important to remember from this part of theory? write your answer in a few sentences.

Answer 1

The trilemma in international economics is the impossible trinity, that is, the concept that states that a fixed foreign exchange rates, free capital movement and an autonomous monetary policy is impossible to achieve. However, any two of the three can be achieved simultaneously.
For instance, if the government decides to corporate fixed exchange rate with free movement of capital, there cannot be an autonomous monetary policy as their will be pressure on the interest rates which needs to be monitored. Similarly, a free capital mobility and an autonomous monetary policy should have a floating exchange rate system; hence fixed exchange rates won't be able to achieve. Lastly, when government pursues a fixed exchange rate with an autonomous monetary policy, whereby it can change its interest rates, the outflow of capital needs to be controlled.