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Level I
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Economics
Economics
Medium
Country Z maintains a fixed exchange rate, allows free movement of capital, and wants to pursue independent monetary policy to combat domestic inflation. According to the impossible trinity, Country Z:
A
Cannot achieve all three objectives simultaneously and must abandon at least one.
B
Can achieve all three if it accumulates sufficient foreign exchange reserves.
C
Should raise interest rates, which will strengthen the peg and control inflation.
D
Can use fiscal policy to offset the constraints of the impossible trinity.
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Tags
#impossible-trinity
#exchange-rate-regime
#monetary-policy
#capital-flows
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