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 = 40 + 0.9∗DI
G = 80
I = 20

Identify the following as True or False?
1) Assume that this economy initially has a fixed tax and that net taxes (taxes minus transfer payments are $100 billion. Disposable income is then (Y−100), where Y is the real GDP. Aggregate output demanded is $500 billion
2) Suppose the government decides to increase spending by $10 billion without raising taxes. Because the expenditure multiplier is 10, this will increase the economy's aggregate output demanded by $100 billion.
3) Now, suppose that the government switches to an income tax, which is the type of variable tax, of 20%. Because consumers retain only 80% of each additional dollar of income, disposable income is now 0.80∗Y. In this case, the economy's aggregate output demanded is $500 billion.
4) Given an income tax of 20%, the expenditure multiplier is approximately 3.6. 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 $36 billion.
5) A $10 billion increase in government purchases will have a larger effect on output under a fixed tax of $100 billion.