If the government wishes to increase GDP by $1200b and the MPC is 0.75, it should:Question 2Select one:A.Increase taxes by $300b.B.Decrease taxes by $300b.C.Decrease taxes by $400b.D.Increase taxes by $400b.

To answer this question, we first need to understand the concept of the multiplier effect in economics. The multiplier effect refers to the increase in final income arising from any new injection of spending. The size of the multiplier depends upon the economy’s marginal propensity to consume (MPC), or in other words, how much of additional income will be spent.

The formula for the multiplier is 1/(1-MPC). Given that the MPC is 0.75, the multiplier would be 1/(1-0.75) = 4.

Now, if the government wants to increase the GDP by $1200 billion, we need to find out by how much the government should increase or decrease taxes.

We know that the change in GDP (ΔY) is equal to the multiplier (k) times the change in spending (ΔG). So, ΔY = k * ΔG.

We can rearrange this formula to find the change in spending needed: ΔG = ΔY / k.

Substituting the given values, we get ΔG = $1200b / 4 =$300b.

So, the government needs to increase spending by $300 billion to increase the GDP by$1200 billion. This can be achieved by decreasing taxes by $300 billion, which would increase the disposable income of the public and lead to increased consumption and spending.

Therefore, the correct answer is B. Decrease taxes by $300b.