Final answer:
The statement during the early 20th century, economists who held that the Ricardian equivalence theorem was theoretically true could support either sound or functional finance is True. (option A)
Step-by-step explanation:
The statement is true, as economists who believed in the Ricardian equivalence could argue for either sound finance, which emphasizes balanced budgets, or functional finance, which focuses on using fiscal policies to achieve economic goals since they believe private saving would adjust to neutralize government fiscal actions. This is because Ricardian equivalence suggests that households will change their saving behavior to offset government deficit or surplus, thereby neutralizing the effect of fiscal policies on the overall economy. Those who believe in Ricardian equivalence might argue for sound finance, implying government budgets should be balanced to avoid imposing future tax burdens on households who will save in anticipation of such taxes. Alternatively, they could support functional finance, where the government adjusts its spending and tax policies to meet economic goals since any fiscal expansion or contraction would ultimately be neutralized by private-sector behavioral changes.
Under Ricardian equivalence, changes in government borrowing would not affect physical capital investment or trade balances, because private saving adjusts to compensate for public saving. This theoretical outcome suggests whether governments choose to borrow or save (sound finance) or to spend or tax according to prevailing economic conditions (functional finance), the aggregate effect on saving, investment, and trade balances would be nullified by corresponding shifts in private saving habits.