Q1. When corporate income taxes are assumed to exist, Modigliani Miller and the traditional theorists agree that capital structure does affect value, so the basic point of dispute disappears. Do you agree? Why or why not?
Q2. Suppose that G increases by 100 to 600 and we assume, as we often do, that firms match the increase in demand by increasing Y by 100. In round two, this is an increase in income of 100 to consumers. Trace out exactly where this 100 increase in income goes in the second round and compare to our simpler treatment with a closed economy and lump sum taxes. Be sure to include the leakages, taxes, Savings and NX. Use the same conditions as stated above.