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impossible trinity Economics presentation
1. ST. JOHN COLLEGE OF ENGINEERING &
MANAGEMENT (MMS-1)
IMPOSSIBLETRINITY
PRESENTED BY :
JAIMIT DADODE
ARON NADAR
MAHAVIR JAIN
VATICAN RIBERO
MOAZ SIDDIQUI
SADHANA YADAV
2. THREE FACTORS OF IMPOSSIBLE TRINITY
The Impossible Trinity is the hypothesis in
macroeconomics that it is impossible to have all three
of the following at the same time:
1.FREE CAPITAL FLOW
2.FIXED EXCHANGED RATE
3.INDEPENDENT MONETORY POLICY
3. FREE CAPITAL FLOW
Capital Inflows :
• Direct Benefit: Generally domestic savings not enough for development
of economies need foreign capital.
• Indirect Benefits: Development of domestic financial sector improved
macroeconomic policies.
Capital Outflows :
• Benefits: People and Companies can diversify their portfolios and take
advantage of growth opportunities elsewhere.
4. FIXED EXCHANGE RATE
Floating exchange rate :
The value of a country's currency change based on market forces. It is also known as free
float. Example; JAPAN, KOREA.
• Managed Float:
A floating exchange rate in which a government intervenes at some frequency to change the
direction of the float by buying or selling currencies. A managed float is also known as a
dirty float. Example; INIDA,CHINA.
Fix exchange rate :
The government manipulates the value of a country's currency.
(A total of 25 countries and regions, including Hong Kong, use a fixed exchange rate system)
5. INDEPENDENT MONETORY POLICY
Role: Maintaining low inflation important for sustained growth.
Monetary Policy: When interest rates are low, borrowers will find it easier to pay back loans
so they will borrow more and spend more. Where interest rates are high, borrowers borrow
less and therefore spend less.
1. Expansionary monetary policy: Central bank speed up economies increase money
supply, decrease interest rate that’s why more borrow and spending.
2. Contractionary monetary policy: Central bank slow down economies decrease money
supply, increase interest rate that means less borrow and spending.
8. POLICY THAT INDIAADOPTS
The current scenario: India like any other economy continues to face this dilemma. It, like many of
the western countries, opted for monetary policy independence. Usually, it allows a free exchange rate.
Once in a while, it controls capital flows.
The rupee exchange rate: The RBI is tasked with the responsibility of ensuring the rupee exchange
rate does not fluctuate too much. The rupee does not have a fixed exchange rate. So, the RBI cannot
intervene too much to ‘fix’ the exchange rate.
The inflow of capital : Since the currency rate is not fixed, any investments by foreigners in India or
any payments made by India in foreign currency will affect the rupee.
Monetary policy independence: Now, if the RBI neither has the freedom to set exchange rates, nor
curtail the flow of capital, then it is unlikely to be independent enough to set interest rates.