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8 May, 2015 - 11:46

Aggregate expenditure (in the opinion of Keynes) is the key to economic activity. That is, what households, businesses and government plan to buy will be the determinant of what firms will eventually produce. In the first step of the analysis, a simplified model excludes government, assumes that no foreign sector is present, and the level of real income (not prices) is the major determinant of aggregate expenditure.

When a family is planning to buy a car or put new appliances in the house, that would be a carefully thought out decision which considers the long term situation of the family. Such purchases are key items of aggregate expenditure.