Final answer:
To achieve a $160 increase in GDP with an MPC of 0.75, government spending should be increased by $40, considering the fiscal multiplier effect.
Step-by-step explanation:
The question involves determining how much government spending should be increased to achieve a desired increase in Gross Domestic Product (GDP), taking into account the marginal propensity to consume (MPC) and the multiplier effect. The student mentioned an MPC of 0.75 and a necessary increase in GDP of $160. To find the needed increase in government spending, we can use the formula for the fiscal multiplier, which is 1/(1-MPC). First, we calculate the fiscal multiplier: 1/(1-0.75) = 4. Then, we divide the necessary increase in GDP by the multiplier to find the needed increase in government spending: $160/4 = $40. Therefore, an increase of $40 in government spending should be sufficient to achieve the desired $160 increase in GDP considering the multiplier effect.