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AGGREGATE EXPENDITURE DETERMINANT: A ceteris paribus factor that affects aggregate expenditures, but which is assumed constant when the aggregate expenditure line is constructed. Changes in any of the aggregate expenditures determinants cause the aggregate expenditure line to shift. While a wide variety of specific ceteris paribus factors can cause the aggregate expenditure line to shift, it's usually most convenient to group them into the four, broad expenditure categories -- consumption, investment, government purchases, and net exports. The reason is that changes in these expenditures are the direct cause of shifts in the aggregate expenditure line. If any determinant affects aggregate expenditures it MUST affect one of these four expenditures.

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Lesson 9: Macro Basics | Unit 5: Issues Page: 15 of 16

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Using the scientific method to test macroeconomic theories is an evolving process. Over time, more hypotheses are tested and macroeconomic theories grow, expand and improve.
  • Hypotheses from macroeconomic theories are not easily subject to experimental testing. Economists can't control the economy but must wait for it to cooperate.
  • The result of combining different political philosophies and vested interests with the inability to provide definitive explanations, creates alternative, competing theories that seek to explain the world.

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EXCHANGE RATE POLICIES

Policies undertaken by domestic governments often in conjunction with international financial organizations to control exchange rates through foreign exchange markets. The three most common exchange rate policies are flexible exchange rates, fixed exchange rates, and managed flexible exchange rates. Flexible exchange rates are allowed to adjust through unrestrained forces of demand and supply in the foreign exchange market. Fixed exchange rates are established at a given level. Managed flexible exchange rates are allowed to change within boundaries, but subject to control if they change too much.

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