Question

When the economy is in a recession, an economist who follows a functional finance principle will most likely advise the government to:

A) do nothing, because it won't affect spending anyway.
B) run a deficit.
C) run a surplus.
D) run a balanced budget, unless it is wartime.

Answer 1

An economist who follows functional finance principles would advise the government to run a deficit during a recession to stimulate the economy and reduce the impacts of the downturn.

Step-by-step explanation:

When the economy is in a recession, an economist following functional finance principles would most likely advise the government to run a deficit. This means the government should engage in an expansionary fiscal policy, which could include reducing taxes or increasing spending to stimulate the economy and shift the aggregate expenditure function upwards. Such measures aim to shorten the duration and lessen the severity of a recession by boosting aggregate demand, leading to increased economic activity and employment.

Although running a deficit increases the national debt, the focus of functional finance is to achieve full employment and economic stability rather than maintaining a balanced budget. Moreover, during a recession, there is less threat of inflation, which allows for such expansionary policies without the significant risk of inflating the economy excessively.