International Variables Are Linked Through Trade and Financial Flows

question 142

Multiple Choice

International variables are linked through trade and financial flows. Therefore, what trilemma is faced by a nation that wishes to keep its exchange rates with other nations fixed?

• A) It can have fixed exchange rates only when it allows free flows of capital and maintains control of its interest rates.
• B) If it wants to control its own monetary policy under fixed exchange rates, then it must restrict foreign investment.
• C) Fixed exchange rates are not possible if the nation allows free flows of capital both into and out of the nation.
• D) Fixed exchange rates are not possible if the nation also wants to control its monetary policy.

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