Problem
Aggregate Demand: Now lets turn our attention to modeling aggregate demand. Answer the questions please.
A. What is the multiplier? What role does it play in economic policy-making?
B. On the following graph draw an aggregate demand model in which the economy suffers a negative shock to investment. Be sure to label your graph completely and show both the original and the post-shock equilibrium.
C. What is the marginal propensity to consume? How does it (tend) to differ by household wealth?
D. What can the government do to effect aggregate demand? Give a specific example of a tool the government can use and how it would affect aggregate demand.