AP Macroeconomics Vocabulary Flashcards

This set contains key vocabulary terms and definitions from the AP Macroeconomics course framework, covering basic concepts, indicators, models, and policy actions.

Scarcity

A fundamental economic condition where individuals and societies are forced to make choices because most resources are limited.

Absolute Advantage

A situation in which an individual, business, or country can produce more of a good or service than any other producer using the same quantity of resources.

Comparative Advantage

A situation in which an individual, business, or country can produce a good or service at a lower opportunity cost than another producer.

Law of Demand

An economic principle stating there is an inverse relationship between price and quantity demanded, leading to a downward-sloping demand curve.

Law of Supply

An economic principle stating there is a positive relationship between price and quantity supplied, leading to an upward-sloping supply curve.

Market Equilibrium

The point achieved at the price at which the quantities demanded and supplied are equal.

Gross Domestic Product $(GDP)$

A measure of the final output of an economy, representing the total flow of income and expenditure.

Unemployment Rate

The percentage of the labor force that is currently out of work.

Natural Rate of Unemployment

The unemployment rate that would exist when the economy produces full-employment real output, equal to the sum of frictional and structural unemployment.

Consumer Price Index $(CPI)$

A measure of the cost of a fixed basket of goods and services in a given year relative to a base year, used to track changes in the standard of living.

Nominal GDP

A measure of how much is spent on aggregate output using current prices.

Real GDP

A measure of how much is produced using constant prices, effectively removing the impact of changes in the overall price level.

Business Cycles

Fluctuations in aggregate output and employment characterized by phases of recession and expansion, with turning points called peaks and troughs.

Aggregate Demand $(AD)$

The relationship between the price level and the quantity of goods and services demanded by households, firms, the government, and the rest of the world.

Marginal Propensity to Consume $(MPC)$

The change in consumer spending divided by the change in disposable income, where $MPC + MPS = 1$.

Short-Run Aggregate Supply $(SRAS)$

A curve showing the relationship between price level and quantity supplied, which is upward-sloping because of sticky wages and prices.

Long-Run Aggregate Supply $(LRAS)$

A vertical curve at the full-employment level of output, corresponding to the production possibilities curve $(PPC)$ as both represent maximum sustainable capacity.

Fiscal Policy

Government implementation of spending and taxation/transfers to achieve macroeconomic goals such as full employment.

Automatic Stabilizers

Government policies or programs, such as tax revenues and transfer payments, that support the economy during recessions and prevent overheating during expansions without discretionary action.

Fractional Reserve Banking

A system where depository institutions keep only a portion of their assets as required reserves and use excess reserves to expand the money supply through loans.

Money Multiplier

The ratio of the money supply to the monetary base, calculated as the reciprocal of the required reserve ratio: $\frac{1}{RRR}$.

Phillips Curve

A model used to represent the relationship between inflation and unemployment in the short run $(SRPC)$ and the long run $(LRPC)$.

Crowding Out

The adverse effect of increased government borrowing leading to decreased levels of interest-sensitive private sector spending in the short run.

Balance of Payments $(BOP)$

An accounting system that records a country's international transactions for a particular time period, consisting of the Current Account $(CA)$ and the Capital and Financial Account $(CFA)$.

Exchange Rate

The price of one currency expressed in terms of another currency in the foreign exchange market.