Aggregate Demand (25 points):Now lets turn our attention to modeling aggregate demand. Answer the questions please.

1. (5 points) What is the multiplier? What role does it play in economic policy-making?

2. (10 points) 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.

3. (5 points) What is the marginal propensity to consume? How does it (tend) to differ by household wealth?

4. (5 points) What can the government do to effect aggregate demand? Give a specific example of a tool the government can use and how it would effect aggregate demand.