During Britain's brief alignment with the ERM from 1990-1992, the trilemma tells us that monetary policy authority no longer existed in Britain. Why?
A) Britain could print more pounds, but could not increase its gold stock.
B) Britain kept monetary growth rates at zero.
C) The British interest rate equaled the German rate to attain uncovered interest parity.
D) The British could lower unemployment using other means such as fiscal policy.

Question

Quizplus · Accepted Answer

During Britain's alignment with the ERM, in order to maintain the fixed exchange rate with the Deutsche Mark, the Bank of England had to equalize interest rates with the German Bundesbank. This meant that Britain had no authority over its monetary policy and was forced to follow the lead of the Bundesbank. Thus, option C is the correct answer. Option A is incorrect because the ERM did not fix exchange rates to gold, but rather to other currencies. Option B is incorrect because zero monetary growth rates were not a requirement of the ERM, and option D is incorrect because fiscal policy is used to influence the real economy, not monetary policy.

During Britain's Brief Alignment with the ERM from 1990-1992, the Trilemma