Your FREE AP Macroeconomics Flashcards 2026 – 200+ Cards

The basic economic problem: unlimited wants but limited resources, forcing trade-offs.

The value of the next-best alternative given up when a choice is made.

A graph of the maximum combinations of two goods an economy can produce. Inside = inefficient, on = efficient, outside = unattainable now.

The ability to produce a good at a lower opportunity cost than another producer. It drives gains from trade.

The ability to produce more of a good than another producer using the same resources.

As the price of a good rises, the quantity demanded falls, all else equal (inverse relationship).

As the price of a good rises, the quantity supplied rises, all else equal (direct relationship).

The price and quantity where the demand and supply curves intersect; the market clears with no shortage or surplus.

When the price is below equilibrium so quantity demanded exceeds quantity supplied; price tends to rise.

When the price is above equilibrium so quantity supplied exceeds quantity demanded; price tends to fall.

Comparing the marginal benefit and marginal cost of an action; do it while MB > MC, stop where MB = MC.

Land, labor, capital, and entrepreneurship — the resources used to produce goods and services.

Why the PPC is bowed outward: resources are not equally suited to all goods, so producing more of one costs increasingly more of the other.

Positive statements describe what is (testable); normative statements express what ought to be (opinion/value).

A manufactured resource (machinery, tools, factories) used to produce other goods, not consumed directly.

Concentrating production on the goods for which a producer has a comparative advantage, then trading.

The rate at which two goods are exchanged; mutually beneficial trade occurs between the two producers' opportunity costs.

Producing the combination of goods most valued by society — where marginal benefit equals marginal cost.

Producing at the lowest possible cost, on the PPC rather than inside it.

Tastes, income, prices of related goods, expectations, and number of buyers — shifters of the demand curve.

Input prices, technology, taxes/subsidies, expectations, and number of sellers — shifters of the supply curve.

Substitutes can replace each other (tea/coffee); complements are used together (cars/gas).

Demand for a normal good rises with income; demand for an inferior good falls as income rises.

The total output and consumption that two parties achieve by specializing per comparative advantage and trading, beyond what they could alone.

In the circular flow, households sell resources in the resource market and buy goods in the product market; firms do the reverse.

A diagram showing the flow of resources, goods, and money between households and firms (and the government and foreign sectors).

Gross domestic product: the market value of all final goods and services produced within a country in a given period.

A sustained rise in the general price level, reducing the purchasing power of money.

GDP valued at constant base-year prices; it measures changes in actual output, removing inflation.

GDP valued at current-year prices; it rises with both output and inflation.

GDP = C + I + G + NX (consumption + investment + government + net exports).

Intermediate goods, used goods, purely financial transactions (stocks/bonds), and transfer payments.

A price index = (nominal GDP ÷ real GDP) × 100; it measures the price level of all goods in GDP.

Unemployed ÷ labor force × 100. The labor force = employed + unemployed (actively seeking work).

All people 16+ who are employed or unemployed and actively seeking work; excludes those not looking.

Labor force ÷ working-age population × 100.

Short-term unemployment from people moving between jobs or newly entering the labor force.

Unemployment from a mismatch of skills or location, often due to technology or shifts in the economy.

Unemployment caused by a downturn in the business cycle; it is zero at full employment.

Frictional + structural unemployment — the rate that exists at full employment (cyclical = 0).

The level of output where only the natural rate of unemployment remains; the economy produces potential GDP.

The average change over time in prices of a fixed market basket bought by a typical urban household; the main inflation gauge.

(New CPI − old CPI) ÷ old CPI × 100.

Inflation caused by rising aggregate demand pulling up the price level.

Inflation caused by rising production costs (a leftward SRAS shift), raising prices and lowering output.

A sustained fall in the general price level (a negative inflation rate).

A decrease in the inflation rate — prices still rise, but more slowly.

Real interest rate = nominal interest rate − inflation rate (the Fisher equation).

Lenders, savers, and those on fixed incomes lose; borrowers and the government (with fixed-rate debt) tend to gain.

Fluctuations of real GDP around its long-run trend: expansion → peak → contraction (recession) → trough.

A significant decline in economic activity, commonly two consecutive quarters of falling real GDP.

The top of the business cycle, where real GDP is highest before a contraction begins.

The bottom of the business cycle, where real GDP is lowest before an expansion begins.

In the circular flow, total spending equals total income equals total output; GDP can be measured by either.

Working part-time or below one's skill level when full-time, skill-appropriate work is desired; not counted as unemployed.

People who have stopped looking for work; they leave the labor force, which can lower the measured unemployment rate.

Real GDP ÷ population; a common measure of a country's average standard of living.

A measure of the price level relative to a base year (set to 100), used to convert nominal to real values.

Extremely rapid inflation that destroys money's value as a store of value and medium of exchange.

The percent change in real GDP from one period to the next; a key measure of economic expansion.

The market value a firm adds at each stage of production; summing value added avoids double-counting in GDP.

Government payments (Social Security, unemployment) for which no good or service is produced; excluded from GDP.

Unreported transactions (illegal or off-the-books) that are not counted in official GDP.

A negative output gap is associated with cyclical unemployment above the natural rate.

Nominal wages are in current dollars; real wages adjust for inflation and reflect purchasing power.

1 ÷ (1 − MPC), or 1 ÷ MPS. If MPC = 0.8, the multiplier is 5.

Total real output demanded at each price level: C + I + G + NX. It slopes downward and shifts when a component changes.

The wealth effect, the interest-rate effect, and the net-exports effect of a changing price level.

Changes in consumption, investment, government spending, or net exports (and the money supply via interest rates).

Upward-sloping: a higher price level raises real output in the short run because some input prices are sticky.

Vertical at full-employment (potential) output; the price level does not affect long-run output.

Input/resource prices, productivity, and supply shocks shift SRAS; rising costs shift it left.

The fraction of each additional dollar of disposable income that is spent. MPC + MPS = 1.

The fraction of each additional dollar of disposable income that is saved. MPS = 1 − MPC.

1 ÷ (1 − MPC) = 1 ÷ MPS. A larger MPC means a larger multiplier.

−MPC ÷ (1 − MPC). It is smaller in size than the spending multiplier and negative.

Equals 1: an equal increase in government spending and taxes raises real GDP by that same amount.

When equilibrium real GDP is below full-employment output (LRAS); calls for expansionary fiscal policy.

When equilibrium real GDP is above full-employment output; calls for contractionary fiscal policy.

Increasing government spending or cutting taxes to shift AD right and close a recessionary gap.

Decreasing government spending or raising taxes to shift AD left and close an inflationary gap.

Where AD, SRAS, and LRAS intersect at full-employment output, with no output gap.

An initial change in spending leads to a larger change in real GDP, because one person's spending is another's income, spent again.

Taxes and transfers (like unemployment benefits) that automatically dampen the business cycle without new legislation.

Deliberate changes in government spending or taxes by Congress and the President to influence the economy.

A sudden change in input costs that shifts SRAS; a negative shock (e.g., oil price spike) raises prices and lowers output (stagflation).

Prices and wages that adjust slowly, which is why SRAS slopes upward and short-run output gaps can persist.

Without policy, an output gap closes as wages/prices adjust and SRAS shifts, returning output to LRAS.

Business spending on capital, new residential construction, and changes in inventories — not the purchase of stocks.

Government purchases of goods and services; it excludes transfer payments like Social Security.

Household spending on goods and services — the largest component of GDP.

Simultaneous high inflation and high unemployment (falling output), typically from a negative supply shock.

Government use of spending and taxes to influence aggregate demand and the economy.

Expansionary boosts AD (fights recession); contractionary reduces AD (fights inflation).

A lower price level raises the real value of money holdings, increasing consumption — a reason AD slopes down.

A lower price level lowers interest rates, raising investment — a reason AD slopes down.

A lower domestic price level makes exports cheaper and imports dearer, raising net exports — a reason AD slopes down.

Demand-pull = rightward AD shift; cost-push = leftward SRAS shift. Both raise the price level.

The real GDP an economy produces at full employment; LRAS sits here.

The difference between actual real GDP and potential GDP; positive = inflationary, negative = recessionary.

Because nominal wages adjust slowly, a higher price level raises profits and output short-run, giving SRAS its upward slope.

Income after taxes; households divide it between consumption and saving (MPC + MPS = 1).

Total planned spending in the economy: C + I + G + NX, the basis of aggregate demand.

Medium of exchange, unit of account, and store of value.

Money's function of being accepted in trade for goods and services, avoiding barter.

Money's function of providing a common measure of value (a price tag).

Money's function of holding purchasing power over time so you can save and spend later.

The most liquid money: currency in circulation plus checkable (demand) deposits.

M1 plus less-liquid near-money such as savings deposits, small time deposits, and money market funds.

Banks hold only a fraction of deposits as reserves and lend out the rest, expanding the money supply.

The portion of deposits a bank must hold (not lend), set by the required reserve ratio.

Reserves a bank holds above its required reserves; these can be lent out to create money.

1 ÷ required reserve ratio; the maximum money the banking system can create from new reserves.

The fraction of deposits banks must keep as reserves rather than lend.

The market where the nominal interest rate is set by a vertical money supply and downward-sloping money demand.

Vertical, set by the central bank; it does not depend on the interest rate.

Downward-sloping: at lower interest rates, the opportunity cost of holding money falls, so people hold more.

The central bank's control of the money supply and interest rates to influence the economy.

The central bank buying or selling government bonds to change reserves and the money supply.

Expansionary: it increases reserves and the money supply, lowering interest rates.

Contractionary: it decreases reserves and the money supply, raising interest rates.

The interest rate the central bank charges banks for short-term loans; raising it is contractionary.

The interest rate banks charge each other for overnight loans; the Fed targets it via open-market operations.

Increase the money supply (buy bonds) → interest rate down → investment up → AD shifts right.

Decrease the money supply (sell bonds) → interest rate up → investment down → AD shifts left.

How easily an asset can be converted to cash without losing value; currency is the most liquid.

The institution that controls the money supply, sets monetary policy, and acts as lender of last resort.

Lowering it lets banks lend more (expansionary); raising it reduces lending (contractionary).

People hold money to make transactions and as an asset; higher interest rates reduce money holdings.

The stated interest rate, set in the money market; it is not adjusted for inflation.

Bond prices and interest rates move inversely: when bond prices rise, yields (interest rates) fall.

With a 10% reserve ratio, $1,000 in new reserves can support up to $10,000 in new deposits (multiplier = 10).

Funds banks hold as vault cash or deposits at the central bank, not lent out.

The central bank's role of lending to banks in a financial crisis to prevent collapse.

Large-scale central-bank purchases of assets to expand the money supply when interest rates are near zero.

Short-run: a downward-sloping inflation–unemployment trade-off. Long-run: vertical at the natural rate of unemployment.

Government deficit borrowing raises the real interest rate and reduces private investment.

Downward-sloping: shows the short-run trade-off between inflation and unemployment.

Vertical at the natural rate of unemployment; there is no long-run inflation–unemployment trade-off.

A rightward AD shift moves the economy up the SRPC (lower unemployment, higher inflation); a leftward shift moves it down.

Changes in expected inflation and supply shocks shift the short-run Phillips curve.

A rightward AD shift = lower unemployment + higher inflation = up the SRPC; the two models tell the same story.

The market where saving (supply) and investment demand set the real interest rate.

National saving (private + public); it slopes upward in the real interest rate.

Borrowing for investment; it slopes downward in the real interest rate.

Government deficit borrowing raises demand for loanable funds, pushing up the real interest rate and reducing private investment.

Set where the supply of and demand for loanable funds intersect; it adjusts saving and investment.

When government spending exceeds tax revenue in a year; financed by borrowing, which can crowd out investment.

When tax revenue exceeds government spending; it adds to national saving (loanable funds supply).

An increase in potential output, shown as a rightward shift of LRAS and an outward shift of the PPC.

More physical and human capital, a larger labor force, better technology, and higher productivity.

Output per worker (or per hour); rising productivity is a key driver of long-run growth and living standards.

The knowledge, skills, and health of workers; investing in education raises productivity and growth.

Tools, machinery, and infrastructure used in production; more capital per worker raises output.

Sustained money supply growth beyond real output growth causes inflation, not higher real output.

MV = PQ; with stable velocity, growth in the money supply (M) feeds into the price level (P) in the long run.

In the long run, output is set by resources and technology, not the price level — so stimulus only raises prices.

Recognition, decision (implementation), and impact lags can make stabilization policy mistimed.

When workers and firms expect higher inflation, the short-run Phillips curve and SRAS shift, embedding the inflation.

Private saving plus public saving (the government surplus); the source of the supply of loanable funds.

Higher investment in capital increases future productive capacity, shifting LRAS right over time.

A larger deficit increases loanable-funds demand, raising the real interest rate (crowding out investment).

Often measured by real GDP per capita; long-run growth raises it.

The average number of times a dollar is spent on final goods in a year; V in MV = PQ.

In the long run, a change in the money supply affects only the price level, not real output.

In a closed economy, national saving equals investment; saving funds the loanable-funds supply.

The government's budget balance (T − G); a surplus adds to national saving, a deficit subtracts.

Household and business saving out of disposable income; part of the loanable-funds supply.

The idea that people use all available information to anticipate policy, which can blunt its short-run effects.

Changes in investment demand and government borrowing (deficits) shift the demand for loanable funds.

Changes in private saving, public saving, and capital inflows shift the supply of loanable funds.

Deficit-financed spending can raise interest rates and reduce private investment, offsetting some of its effect.

People form inflation expectations based on past inflation; this can shift the short-run Phillips curve over time.

Demand-side policy shifts AD; supply-side policy (e.g., investment incentives) aims to shift SRAS/LRAS right.

The price of one currency in terms of another, set by supply and demand in the foreign exchange market.

Exports minus imports; a component of aggregate demand in an open economy.

A record of all transactions between a country and the rest of the world: current account + financial (capital) account.

The part of the balance of payments tracking exports and imports of goods/services plus income flows.

The part of the balance of payments tracking flows of financial assets and investment between countries.

When a country imports more than it exports (negative net exports / current-account deficit).

When a country exports more than it imports (positive net exports / current-account surplus).

The market where currencies are traded; supply and demand set each exchange rate.

A rise in a currency's value relative to another; imports become cheaper and exports more expensive.

A fall in a currency's value relative to another; exports become cheaper and imports more expensive.

Higher domestic real interest rates attract foreign capital, raising demand for the currency, which appreciates.

A stronger (appreciated) currency raises export prices abroad and lowers import prices, tending to reduce net exports.

Comes from foreigners buying the country's exports and investing in its assets; more demand → appreciation.

Comes from domestic residents buying foreign goods/assets; more supply → depreciation.

They tend to offset: a current-account deficit is matched by a financial-account surplus (capital inflow).

An exchange rate determined by market supply and demand rather than fixed by the government.

When foreign purchases of domestic assets exceed domestic purchases of foreign assets; finances a trade deficit.

Taxes on imports that raise their price, reducing imports; they protect domestic producers but can reduce overall gains from trade.

Rising net exports shift AD right; falling net exports shift AD left.

Countries gain by exporting goods of low opportunity cost and importing goods of high opportunity cost.

Foreign investment in U.S. assets raises demand for dollars, causing the dollar to appreciate.

Goods and services produced domestically and sold abroad; they add to net exports and GDP.

Goods and services produced abroad and bought domestically; they subtract from net exports.

The nominal rate is the price of one currency in another; the real rate adjusts for price levels in both countries.

Higher domestic inflation makes exports less competitive, reducing demand for the currency and causing depreciation.

Expansionary monetary policy lowers interest rates, reducing currency demand and tending to depreciate it.