Australia is a small open economy with floating exchange rates or monetary autonomy. Explain whether Australia has a free capital mobility policy or not. List the policy Australia must forfeit as part of the "impossible trinity" concept of open-economy macroeconomics policies. If a country does not have a floating exchange rate but has its own currency, what policy options will the government have under the impossibility trinity rule?

Discuss and highlight the impact of the different types of exchange rates on the volatility of the exchange rates in a country of your choice.(6 marks)

(b) Describe briefly why the existence of covered interest-rate differentials is an indication of a lack of free capital mobility. (4 marks)