Exercise 2 Consider the elements of the impossible trinity: (i) independent monetary policy, (ii) free capital mobility, and (iii) fixed exchange rate.

a. Using the concepts seen throughout this chapter and Chapter 7, explain why only two of these objectives can be simultaneously attained.

292 PRINCIPLES OF INTERNATIONAL FINANCE AND OPEN ECONOMY MACROECONOMICS

b. Research on the functioning of the following international monetary systems, explaining their main characteristics and countries that have adopted them:

• Gold Standard

• Bretton Woods System

c. How are the international monetary systems related to the impossible trinity? Explain your answer.

d. How is your answer to the previous item related to the factors that resulted in the breakup of said exchange rate mechanisms?