Explanation:

This old trilemma asserts that a country cannot maintain, simultaneously, all three policy goals of – (a) free capital flows, (b) a fixed exchange rate, and (c) an independent monetary policy.

Option 1: If we maintain free capital flows and a fixed exchange rate, the money supply in the economy will increase/decrease with an increase/decrease in capital flows. There is no way we can manage inflation in the economy (due to external influences) as the option of sterilization and exchange rate management in not available. Option 2: If we maintain free capital flows and have an independent monetary policy, then exchange rate will change. It cannot be stable.

Option 3: The same applies for the other option, we cannot have free capital flows, if exchange rate is fixed and monetary policy acts independently. It will block free flow of capital.