Question

explain why monetary autonomy is impossible on its own with a fixed exchange rate using IS/LM or the trilemma, and why monetary policy must accompany fiscal policy with a fixed exchange rate

Answer 1

Answer - The autonomy of monetary policy is impossible on it's own with fixed exchange rate , Because under monetary policy central Banks can use two types of monetary policies expansionary and contractionary monetary policies .

Expansionary Monetary Policy - Under this Central Bank use open market operation they buy the bonds from the market . They do this by printing more money which lead to increase in liquidity in market but due to this interest rate goes down and the value of currency also devalue too . So, under fixed exchange rate Central can not use Expansionary Monetary Policies to that extent .

Contractionary Monetary Policy - Under this central Banks sells government bonds in open market which lead to decrease in liquidity available in market . Which lead to increase in the interest rate and appreciation of currency too. But under the Fixed exchange rates Central Banks have to take care of interest rate which might value of currency.

That's why Fiscal and monetary must accompany each with fixed exchange rate because the appreciation and depreciation of currency due to monetary policy can be controlled with help the fiscal policy . Like we when value of currency appreciate than government increase the spending and increase investment which help value of currency to keep constant as before similarly in the depreciation of currency government reduce the spending which help currency to become stable. With this country can keep it's value of currency under the limit of fixed exchange rate and does not violate it.