Question

5. a. Economists sometimes refer to the attempt by countries to fix their exchange rates, control their money supplies, and operate with open capital accounts in their balance of payments (that is, to have no restrictions on capital movements) as the "impossible trinity" of international macroeconomics. Based on what you have learned so far, would you agree that this combination of policies is impossible to achieve? Explain.

b. Use three of the models you have studied (the fixed exchange rate, Bretton Woods, and the floating exchange rate model) to illustrate the application of “impossible trinity” of open-economy macroeconomics

c. Many economists claim that in a small open economy operating under a fixed exchange rate regime, the domestic central bank is powerless to control the money supply and as such monetary policy is powerless as a tool to stabilize domestic output. Do you agree or disagree? Explain.

Answer 1

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