RAS question
The 'impossible trinity' (trilemma) in economics states that a country cannot simultaneously have:
Correct answer: (D) Fixed exchange rate, free capital movement, and independent monetary policy.
The impossible trinity says a country cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy.
Explanation
The Mundell-Fleming impossible trinity is a constraint on macroeconomic policy choice. It says that three objectives cannot be held together: a fixed exchange rate, free capital flows, and independent monetary policy. The IMF source states the same core trade-off: monetary independence sits at the centre of the trilemma because independent monetary policy, a fixed exchange rate, and free movement of capital cannot exist at the same time. A country can therefore choose only two of the three. The given example fits this logic: India uses a managed float and partial capital controls so that it can preserve monetary policy independence instead of locking itself into all three objectives at once.
Why the other options are wrong
- (A) Trade surplus, budget surplus, and low debt are fiscal and external outcomes, not the three policy choices named in the impossible trinity.
- (B) Low inflation, high growth, and low unemployment describe macroeconomic performance goals, whereas the trilemma is about exchange-rate policy, capital mobility, and monetary independence.
- (C) High savings, high investment, and high consumption are aggregate-demand and growth variables, not the fixed exchange rate-free capital movement-independent monetary policy combination in the trilemma.
Concept
This tests the open-economy macroeconomics part of Indian Economy: exchange-rate regimes, capital flows, and monetary policy autonomy. It recurs in RAS because it explains why governments and central banks face trade-offs rather than getting every macroeconomic target together.