AP Macroeconomics Vocabulary Review

Vocabulary flashcards covering core AP Macroeconomics concepts including trade, supply and demand, indicators, fiscal/monetary policy, and international finance.

Opportunity Cost

The measure of the potential gain of an alternative choice not taken.

Production Possibilities Curve (PPC)

A model used to show the tradeoffs associated with allocating resources differently toward the production of two goods.

Absolute Advantage

When a country or individual can produce more of a particular good using the same resources compared to another producer.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer.

Law of Demand

The economic principle stating that, with all else being equal, as the price of a good increases, the quantity demanded decreases.

Law of Supply

The economic principle stating that there is a direct relationship between price and the quantity supplied.

Market Surplus

A condition that occurs when the quantity supplied is higher than the quantity demanded, typically when the price is set above equilibrium.

Market Shortage

A condition that occurs when the quantity demanded is higher than the quantity supplied, typically when the price is set below equilibrium.

Gross Domestic Product (GDP)

The measure of the final output of the economy within a country in a given period.

Circular Flow Model

A model illustrating that households provide labor services to firms in exchange for wages, and firms provide goods and services to households in exchange for payment.

Natural Rate of Unemployment

The measure of unemployment that would occur in the absence of economic fluctuations, calculated as the sum of frictional and structural unemployment.

Frictional Unemployment

The measure of unemployment that occurs when workers are moving from one job to another.

Structural Unemployment

Unemployment resulting from the number of individuals who no longer have skills that are valued by the labor market, often due to technological changes.

Cyclical Unemployment

The measure of unemployment that changes over time due to economic recessions or expansions.

Labor Force

The number of people who are currently working or are actively looking for work within the past 4 weeks.

Inflation Rate

The percentage change in price levels over a period of time.

Deflation

The overall decrease in prices of goods and services in the economy.

Disinflation

A temporary slowing of the rise in prices over the short term.

Consumer Price Index (CPI)

A measure of the average change in prices paid by urban consumers over time for a select set of goods and services.

Substitution Bias

A bias that can cause the CPI to overstate the true inflation rate because it ignores consumers switching from relatively expensive products to cheaper alternatives.

Nominal Variables

Economic variables measured in current prices, unadjusted for inflation.

Real Variables

Nominal variables that have been deflated by the price level to adjust for inflation.

Wealth Effect

The principle that a sharp rise in the aggregate price level decreases the purchasing power of consumers, thereby decreasing the quantity of aggregate demand.

Interest Rate Effect

The principle that a higher aggregate price level leads to higher interest rates, which reduces borrowing and decreases consumption and investment spending.

Short-Run Aggregate Supply (SRAS)

A curve that has a positive slope because a higher aggregate price level leads to increased profits for producers in the short run.

Long-Run Aggregate Supply (LRAS)

A vertical curve indicating that in the long run, changes in the aggregate price level have no effect on aggregate output.

Stagflation

An economic problem characterized by high price levels (inflation) and low output (stagnation), usually resulting from a negative supply shock.

Sticky Wages

The concept that nominal wages do not adjust immediately to changes in economic conditions because firms renegotiate contracts semi-annually or annually.

Marginal Propensity to Consume (MPC)

The ratio of the change in consumption to the change in disposable income, where $MPC + MPS = 1$.

Marginal Propensity to Save (MPS)

The ratio of the change in savings to the change in disposable income.

Expenditure Multiplier

A factor that determines the total change in aggregate demand resulting from a change in autonomous expenditures, calculated as $\frac{1}{MPS}$.

Expansionary Fiscal Policy

Policy actions such as increasing government spending or decreasing taxes intended to increase aggregate demand.

Contractionary Fiscal Policy

Policy actions such as decreasing government spending or increasing taxes intended to reduce inflation.

M1

A monetary aggregate that includes currency in circulation, demand deposits, and traveler's checks.

M2

A monetary aggregate that includes all of M1 plus savings deposits, time deposits, and money market funds.

Open Market Operations

The purchase and sale of government securities (bonds) by the central bank to influence the money supply.

Money Multiplier (Banking)

The factor by which the banking system expands the money supply, calculated as $\frac{1}{\text{reserve ratio}}$.

Discount Rate

The interest rate that allows commercial banks to borrow money directly from the central bank.

Federal Funds Rate

The interest rate that banks charge each other for overnight loans.

Loanable Funds Market

A model showing the relationship between borrowers and savers, with the real interest rate on the vertical axis and the quantity of funds on the horizontal axis.

Crowding Out

A decrease in private spending (investment and consumption) that occurs when higher government borrowing increases real interest rates.

Current Account (CA)

A part of the balance of payments that records the value of net exports (exports minus imports), net investment income, and net transfers.

Capital and Financial Account (CFA)

A part of the balance of payments that records the purchase and sale of financial assets, such as stocks, bonds, and real estate.

Appreciation

An increase in the value of a currency in the FOREX market relative to another currency.

Depreciation

A decrease in the value of a currency in the FOREX market relative to another currency.