Explanation

Capital restrictions are government-imposed controls on the flow of capital across borders. These restrictions typically include:

1. Limits on capital outflows - restricting residents from moving capital abroad
2. Limits on capital inflows - restricting foreign investment into the country
3. Exchange controls - limiting the ability to convert domestic currency to foreign currency

Why option B is correct: Capital restrictions help a country exercise control over its external balance by:

• Preventing capital flight during economic crises
• Maintaining exchange rate stability
• Controlling balance of payments deficits
• Preserving foreign exchange reserves
• Managing current account imbalances

Why option A is incorrect: Capital restrictions typically prevent capital from earning the highest return by limiting its ability to flow to markets with higher returns. Free capital mobility allows capital to seek the highest risk-adjusted returns globally.

Why option C is incorrect: While capital restrictions might provide short-term stability, they generally hinder long-term economic growth by:

• Reducing access to foreign investment
• Limiting technology transfer
• Decreasing competition and efficiency
• Increasing borrowing costs
• Creating market distortions

Empirical evidence shows that countries with fewer capital restrictions tend to experience higher long-term growth rates due to better resource allocation and increased investment opportunities.