Consider a small country that is closed to trade, so its net exports are equal to zero. 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 = 30+0.6 X DI

G = 120

I = 70

Assume that this economy initially has a fixed tax and that net taxes (taxes minus transfer payments) are $100 billion. Disposable income is then Consider a small country that is closed to trade, , where Y is real GDP. Aggregate output demanded is - .

Suppose the government decides to increase spending by $10 billion without raising taxes. Because the expenditure multiplier is , this will increase the economy's aggregate output demanded by .

Now suppose that the government switches to an income tax, which is a type of variable tax, of 25%. Because consumers retain only 75% of each additional dollar of income, disposable income is now . In this case, the economy's aggregate output demanded is .

Given an income tax of 25%, the expenditure multiplier is approximately . Therefore, if the government decides 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 (Answer one of these two??Variable tax of 25% or is it a fixed tax of 100 Billion) .