6. You are given the following data concerning Freedonia, a legendary country: Consumption function: C = 200 + 0.8Y
Investment function: I = 100

a. What is the marginal propensity to consume in Freedonia, and what is the marginal
propensity to save?
b. Graph equations (3) and (4) and solve for equilibrium income.
c. Suppose equation (2) is changed to (2´) I = 110. What is the new equilibrium level of
income? By how much does the $10 increase in planned investment change equilibrium
income? What is the value of the multiplier?
d. Calculate the saving function for Freedonia. Plot this saving function on a graph with
equation (2). Explain why the equilibrium income in this graph must be the same as in
part b.

7.
a) Assume that the multiplier in a country is equal to 4 and that autonomous real consumption
spending is $1 trillion. If current real GDP is $15 trillion, what is the current value of real
consumption spending?
b) An economy has a fixed price level, no imports, and no income taxes. An increase in
autonomous expenditure of $2 trillion increases equilibrium expenditure by $8 trillion. Calculate
the multiplier and the marginal propensity to consume.