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Using the IS-LM-FX framework, explain carefully why monetary policy is effective in the short run at expanding output under a flexible exchange rate but entirely ineffective under a fixed exchange rate. What do we mean by the impossibility of an autonomous (or independent) monetary policy with the fixed exchange rate? How is this a reflection of the policy trilemma?
IS-LM-FX framework is an economic model that is independently set forth to describe a small open economy. This model portrays... View the full answer