Q: Suppose, the government of Australia incurs a budget deficit of $50 billion due to increased government spending in 2020 as result of Covid 19. Because of this, the government borrowing in 2021 increases by the same amount.

(a) Show this development using a graph representing the market for loanable funds for Australia . Explain in writing the effect of this on interest rates. (4 marks).

(b) Compare the size of equilibrium changes in 1) investment, 2) public saving, 3) private saving and 4) national saving (public saving + private saving) with $50 billion increase in borrowing. Compare the changes (increase/decrease) in these variables indicating same, less or more than the $50 billion. (4 marks)

(c) Will the equilibrium quantity of national savings change by more or less than the initial change in public saving? Explain your answer. (2 marks)