Which of the following describes functional finance?
A) Budget deficits during recessions are covered by budget surpluses during expansions.
B) Budget deficits ensure that the economy produces at its potential output.
C) Budgets are balanced annually, except during war.
D) Budget deficits do NOT occur.

Question

Which of the following describes functional finance?  
A) Budget deficits during recessions are covered by budget surpluses during expansions. 
B) Budget deficits ensure that the economy produces at its potential output. 
C) Budgets are balanced annually, except during war. 
D) Budget deficits do NOT occur.

Quizplus · Accepted Answer

Functional finance is the view that fiscal policy should be used to achieve the maximum social dividend rather than to balance budgets. This is achieved by adjusting government spending and taxes to ensure that the economy operates at its potential output level. Hence, option B is the closest to describing functional finance.

Which of the Following Describes Functional Finance