Final answer:
The view that the government should adjust its fiscal stance based on economic conditions is known as functional finance. This approach is different from sound finance's emphasis on balance and from the Ricardian equivalence which claims government borrowing doesn't affect the economy due to offsetting private sector behavior. Hence, the correct answer is option B.
Step-by-step explanation:
The view that the government should run either a deficit or surplus depending on the state of the economy is known as functional finance. This theory is contrasted with sound finance, which advocates for a balanced budget, and the Ricardian equivalence theorem, which suggests that fiscal expansions or contractions are offset by private sector behavior so they have no net effect on the economy. New Classical economists might critique the underlying assumptions of functional finance, arguing that market imperfections are temporarily exploitable but are ultimately resolved by rational expectations.
Functional finance posits that the government should actively use fiscal policy to stabilize the economy, running deficits during economic downturns to stimulate demand, and surpluses in times of boom to prevent inflation. This approach is associated with economist Abba Lerner, who argued that the primary economic goals of the government should be to ensure full employment and price stability rather than focusing on maintaining a balanced budget.