Exercise 2 With respect to the sustainability of deficits in current account, answer the following:

a. Intertemporal models for determining current account say that it may be desirable for a developing country to accumulate deficits in current transactions. What conditions should be met for this trajectory to be beneficial to the country?

b. However, history has shown us that maintaining elevated deficits in current account can lead a country into serious balance of payment crises, with high costs in terms of welfare.

Keeping this fact in mind, a country, initially being under full employment and presenting an elevated deficit in current account, desires to implement an economic policy with the objective of reducing the probability of suffering a balance of payments crisis. Without altering the levels of consumption and investment, what would be the best economic policy to be implemented in the country? Why?