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      Question

      According the budget philosophy known as functional

      finance?
      A The budget should be balanced annually Correct Answer Incorrect Answer
      B Surpluses should be run during periods of prosperity and deficits should be run during recessions Correct Answer Incorrect Answer
      C The government should not worry about balancing the budget instead focus on reaching the potential output level Correct Answer Incorrect Answer
      D Money management should be left to the market forces Correct Answer Incorrect Answer
      E All of the above Correct Answer Incorrect Answer

      Solution

      Functional finance is an economic theory proposed by Abba P. Lerner. It states that government should finance itself to meet explicit goals, such as taming the business cycle, achieving full employment, ensuring growth, and low inflation . The principal ideas behind functional finance can be summarized as: •Governments have to intervene in the national and global economy; they are not self-regulating. •The principal economic objective of the state should be to ensure a prosperous economy. •Money is a creature of the state; it has to be managed. •Fiscal policy should be directed in light of its impact on the economy, and the budget should be managed accordingly, that is, 'balancing revenue and spending' is not important; prosperity is important.

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