Consider a small country that is closed to trade, so its net exports are equal to zero. Suppose t… Show more Consider a small country that is closed to trade, so its net exports are equal to zero. Suppose the following equations describe the economy of this country in billions of dollars, where C is consumption, DI is disposable income, I is investment, and G is government purchases: C = 40 + 0.9DI G = 80 I = 20 Initially, this economy had a fixed tax. Suppose net taxes were $100 billion, so that disposable income was equal to Y 100, where Y is real GDP. In this case, this eoonomy’s aggregate output demanded was______. Suppose the government decides to increase spending by $10 billion without raising taxes. Because the spending multiplier is _______, this will increase the eoonomy’s aggregate output demanded by __________. Now suppose that the government switches to a variable tax on income of 20%. Because consumers retain the remaining 80% of their income, disposable income is now equal to 0.8oY. In this case, the economy’s aggregate output demanded is _________. Under a variable tax on income of 20%, the spending multiplier is approximately ___________. Therefore, if the government decided to increase spending by $10 billion without raising tax rates, this would increase the economy’s aggregate output demanded by approximately ___________. A $10 billion increase in government purchases will have a larger effect on output under a __________ (fixed tax of $100 billion / variable tax of 20%). • Show less