Suppose that a country is borrowing (and hence running a current account deficit) at a point in time. Given the growing level of debt, Senator John Smith looks for economic advice from three prestigious economists. Economist A is worried about the sustainability of this debt and suggests that the best policy action is to impose capital controls which will make international borrowing prohibitively expensive. Economist B strongly disagrees, arguing that since output is expected to grow over time, borrowing will allow consumers to smooth their consumption path and maximize their welfare. Economist C has privileged information that confirms that the country is about to discover a new technology that will require an upfront investment. She/he argues that this will be problematic since in order to finance this investment, borrowing will have to increase even more reducing household consumption, so the best policy response should be to impose capital controls. If the main goal of the policymaker is to maximize the welfare of the representative household, which economist is right:

Select one:

None of them is right

A

B

C

both B and C