Which of the following is a major challenge for monetary policy in an open economy?
A. Complete control over all three objectives simultaneously
B. Impossible trinity or trilemma of fixed exchange rate, free capital flows and independent monetary policy
C. No impact of capital flows
D. Absence of any trade-off
Answer: Option B
Solution (By JKSSB Mock Tests)
The impossible trinity states that it is impossible to have a fixed exchange rate, free capital mobility and an independent monetary policy simultaneously; only two of the three can be achieved.
Explanation:
Network externalities exist when the utility that a user derives from a good or service depends positively on the number of other users of the same or compatible goods.
Explanation:
In a liquidity trap, interest rates are already so low that people prefer to hold cash, and further increases in money supply do not lead to a fall in interest rates or increase in investment.
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