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 = 100 + 0.75 times DI G = 50 I = 80 Assume that this economy initially has a fixed tax and that net taxes (taxes minus transfer payments) are $40 billion. Disposable income is then (gamma - 40), where gamma 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 5%. Because consumers retain only 95% of each additional dollar of income, disposable income is now 0.95 times gamma. In this case, the economy's aggregate output demanded is . Given an income tax of 5%, 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 .