According to the budget philosophy of functional finance, _____
A) the budget should be balanced annually.
B) surpluses should be run during periods of prosperity and deficits should be run during recessions.
C) the government budget should be whatever is necessary to have an economy operate at potential GDP.
D) the budget should never be in balance.
E) the rate of growth in the national debt should equal the rate of growth in the money supply.

Question

Quizplus · Accepted Answer

Functional finance argues that the government budget should be designed to ensure that the economy operates at its potential GDP level. This means that the budget should be adjusted as necessary to provide the necessary level of demand to achieve full employment and stable prices. This may mean running deficits during recessions, but it does not mean that a balanced budget should be a goal in and of itself. Balancing the budget could lead to unnecessary fiscal austerity, which could be damaging to the economy.

According to the Budget Philosophy of Functional Finance, _____