Final answer:
The marginal propensity to save is 40% in the given model of a closed economy. The equilibrium for the economy can be found by setting aggregate expenditures equal to national income and solving for G. To achieve a potential GDP of 3,500m, we can either solve directly for G or calculate the multiplier and determine the required change in government spending.
Step-by-step explanation:
To calculate the marginal propensity to save (MPS) in a closed economy, we use the formula MPS = 1 - MPC, where MPC is the marginal propensity to consume. In the provided model, the MPC can be determined from the consumption function, C = 300m + 0.60Y. Since MPC is represented by the coefficient of Y in the consumption function, which is 0.60, the MPS would therefore be 1 - 0.60 = 0.40 or 40%. This means for every additional unit of income, the economy saves 40% of it.
To find the equilibrium for an economy, and the change in government spending required to achieve a potential GDP of 3,500m, we need to use the aggregate expenditures (AE) model. The AE is given by the sum of consumption (C), investment (I), government spending (G), exports (X) minus imports (M), which in our case is AE = C + I + G + X - M. By inserting the values into AE, setting it equal to Y, and replacing T with 0.25Y where needed, we can solve for the equilibrium and calculate the required change in G.