Economists who believe in sound finance would say that in a recession, the government should:
a. run a budget deficit because the ricardian equivalence theorem is true both in theory and in practice.
b. run a budget deficit despite the truth of the ricardian equivalence theorem.
c. maintain a balanced budget because the ricardian equivalence theorem is true in practice.
d. maintain a balanced budget for political and moral reasons.

The answer is: D) Maintain a balanced budget for political and moral reasons.

Explanation:

First of all, the Ricardian Equivalence Theorem is only hypothetically true with a lot of controversial assumptions and it has never been proven to work for extended periods of time. The notion that a government´s spending doesn´t affect people´s consumer and savings habits is not true.

Empirically whenever the government overspends and increases its deficit (usually by issuing bonds), savings from private citizens and companies tend to decrease.

The idea of sound finance tends to balance the government´s budget, not increase its deficit.

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explanation:

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