Question 2 Consider the equilibrium equation in the goods market: Y =c0 +c1(Y T)+I +G ,

where: Y is the real domestic output, T is the tax revenue, I is the exogenous investment spending, G is the exogenous government spending, c0 is the consumption spending independent from Y , and c1 is the Marginal Propensity to Consume (MPC), with 0 < c1 < 1.

The on-going war between Russia and Ukraine has created economic uncertainty around the globe, shifting the consumption spending.

Assume that:

(i) the Australian households now choose to save more, i.e., increase in the marginal propensity to save (MPS) during this uncertain period, ceteris paribus.

(ii) Australian government is running a balanced budget, i.e. G = T . Explain and illustrate graphically the effect of the increase in the MPS on:

(a) The total demand line (ZZ). Show clearly the effect on the intercept with the vertical axis and the slope.

(b) The autonomous spending.

(c) The multiplier.

Please explain graphically and in detail.