When capital flows freely across a country’s borders, fixing the exchange rate means giving up discretionary monetary policy.

a. Purchasing power parity implies that in the long run exchange rates are tied to inflation differentials across countries.

b. Capital market arbitrage means that in the short run the exchange rate is tied to differences in interest rates.

c. Monetary policymakers can have only two of the following three options: open capital markets, control of domestic interest rates, and a fixed exchange rate.

d. Countries that impose controls on capital flowing in and/or out can fix the exchange rate without giving up discretionary monetary policy.