Which of the following is a major challenge for monetary policy in an open economy?
A. No impact of capital flows
B. Impossible trinity or trilemma of fixed exchange rate, free capital flows and independent monetary policy
C. Complete control over all three objectives simultaneously
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:
Necessities with few or no close substitutes tend to have inelastic demand because consumers cannot easily reduce consumption when price rises.
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