AP Macroeconomics Key Terms & Vocabulary
75 essential AP Macroeconomics terms, defined — aligned to the College Board CED.
- A
- absolute advantage
- Being able to produce more of a good than someone else using the same amount of resources.
- AD
- Aggregate Demand — the total demand for all goods and services in an economy at different price levels.
- AFC
- Average Fixed Cost — fixed costs divided by quantity produced. Always decreases as output increases.
- appreciation
- When a currency increases in value relative to another currency. Makes imports cheaper, exports more expensive.
- AS
- Aggregate Supply — the total supply of all goods and services in an economy at different price levels.
- ATC
- Average Total Cost — total cost divided by quantity produced. The per-unit cost.
- AVC
- Average Variable Cost — variable costs divided by quantity produced.
- B
- BOP
- Balance of Payments — a record of all economic transactions between a country and the rest of the world.
- C
- comparative advantage
- Being able to produce a good at a lower opportunity cost than someone else. This is what determines who should specialize in what.
- complement
- A good used together with another. If the price of one goes up, demand for the other decreases (phones and phone cases).
- consumer surplus
- The difference between what consumers are willing to pay and what they actually pay. The triangle above the price, below the demand curve.
- CPI
- Consumer Price Index — measures the average change in prices paid by consumers for a basket of goods and services over time.
- crowding out
- When increased government borrowing drives up interest rates, which reduces private investment spending.
- cyclical unemployment
- Unemployment caused by economic downturns. Rises during recessions, falls during expansions.
- D
- deadweight loss
- The lost economic efficiency when the market isn't at equilibrium — from taxes, price controls, or monopoly power.
- deflation
- A sustained decrease in the general price level. Sounds good, but it can signal a shrinking economy.
- demand shifters
- Factors that move the entire demand curve: income, tastes, price of related goods, expectations, number of buyers.
- depreciation
- When a currency decreases in value relative to another currency. Makes exports cheaper, imports more expensive.
- discount rate
- The interest rate the Federal Reserve charges banks for borrowing directly from it.
- E
- elasticity
- How sensitive quantity demanded or supplied is to a change in price. Elastic = very responsive. Inelastic = not very responsive.
- equilibrium
- The point where quantity demanded equals quantity supplied. No shortage, no surplus — the market clears.
- exchange rate
- The price of one currency in terms of another. Determined by supply and demand in the FOREX market.
- externality
- A cost or benefit that affects someone who isn't directly involved in the transaction.
- F
- federal funds rate
- The interest rate banks charge each other for overnight loans. The Fed's main policy target.
- fiscal policy
- Government decisions about spending and taxation to influence the economy. Controlled by Congress/Parliament.
- FOREX
- Foreign Exchange Market — where currencies are bought and sold. Exchange rates are determined here.
- free rider problem
- When people benefit from a public good without paying for it, leading to underproduction by the market.
- frictional unemployment
- Short-term unemployment from people transitioning between jobs. Normal and healthy.
- FRQ
- Free Response Question — the written portion of the AP exam where you explain, graph, and calculate.
- full employment
- When the economy is at the natural rate of unemployment — only frictional and structural unemployment exist, no cyclical.
- G
- game theory
- The study of how firms make strategic decisions when their outcomes depend on what competitors do.
- GDP
- Gross Domestic Product — the total market value of all final goods and services produced in a country in one year.
- I
- indeterminate
- In double-shift problems, the variable (price or quantity) whose direction can't be determined without knowing which shift is larger.
- inferior good
- A good you buy less of when your income increases (e.g., instant noodles, bus rides).
- inflation
- A sustained increase in the general price level of goods and services over time.
- L
- loanable funds market
- A model showing the supply and demand for loans. The price is the real interest rate.
- LRAS
- Long-Run Aggregate Supply — aggregate supply when all prices have fully adjusted. Always vertical at full employment output.
- M
- MC
- Marginal Cost — the cost of producing one more unit of a good.
- monetary policy
- Central bank decisions about the money supply and interest rates to influence the economy. Controlled by the Federal Reserve (in the U.S.).
- money supply
- The total amount of money circulating in an economy. The Fed controls this through monetary policy tools.
- monopolistic competition
- A market with many firms selling similar but slightly different products (e.g., restaurants, clothing brands).
- monopoly
- A market with one seller and no close substitutes. The firm IS the market and can set its own price.
- MPC
- Marginal Propensity to Consume — the fraction of each additional dollar of income that gets spent (not saved).
- MPS
- Marginal Propensity to Save — the fraction of each additional dollar of income that gets saved (not spent). MPC + MPS = 1.
- MR
- Marginal Revenue — the revenue earned from selling one more unit of a good.
- MRC
- Marginal Resource Cost — the additional cost of hiring one more unit of a resource.
- MRP
- Marginal Revenue Product — the additional revenue a firm earns from hiring one more unit of a resource (like one more worker).
- multiplier effect
- When an initial change in spending causes a larger final change in GDP. Multiplier = 1 / (1 - MPC).
- N
- natural rate of unemployment
- The unemployment rate when the economy is at full employment — includes frictional + structural, but zero cyclical.
- negative externality
- When a transaction imposes costs on third parties (e.g., factory pollution affecting nearby residents).
- normal good
- A good you buy more of when your income increases (most goods).
- O
- oligopoly
- A market with a few large firms that are interdependent — each firm's decisions affect the others.
- open market operations
- The Fed buying or selling government bonds to increase or decrease the money supply. The most commonly used monetary policy tool.
- opportunity cost
- The value of the next best alternative you give up when making a choice. Not everything you gave up — just the single best option you didn't pick.
- P
- perfect competition
- A market with many small firms selling identical products. No single firm can influence the market price.
- Phillips curve
- Shows the short-run tradeoff between inflation and unemployment. Lower unemployment → higher inflation, and vice versa.
- positive externality
- When a transaction creates benefits for third parties (e.g., getting vaccinated protects people around you).
- PPC
- Production Possibilities Curve — a graph showing every possible combination of two goods an economy can produce using all its resources.
- price ceiling
- A maximum price set by the government below equilibrium (e.g., rent control). Creates a shortage.
- price floor
- A minimum price set by the government above equilibrium (e.g., minimum wage). Creates a surplus.
- producer surplus
- The difference between what producers receive and the minimum they'd accept. The triangle below the price, above the supply curve.
- public good
- A good that is non-excludable (can't prevent people from using it) and non-rivalrous (one person's use doesn't reduce it for others). Example: national defense.
- Q
- quota
- A limit on the quantity of a good that can be imported. Restricts supply and raises prices.
- R
- recession
- A significant decline in economic activity lasting at least two consecutive quarters of falling real GDP.
- reserve requirement
- The percentage of deposits banks must keep on hand and not lend out.
- S
- scarcity
- Resources are limited, but human wants are unlimited — so choices must be made.
- shortage
- When quantity demanded exceeds quantity supplied. Too many buyers, not enough product at that price.
- SRAS
- Short-Run Aggregate Supply — aggregate supply when some input prices (like wages) haven't adjusted yet.
- stagflation
- The worst combo — high inflation AND high unemployment at the same time. Caused by a negative supply shock.
- structural unemployment
- Unemployment caused by a mismatch between workers' skills and available jobs (e.g., automation replacing factory workers).
- substitute
- A good that can replace another. If the price of one goes up, demand for the other increases (Coke vs. Pepsi).
- supply shifters
- Factors that move the entire supply curve: input prices, technology, taxes/subsidies, expectations, number of sellers.
- surplus
- When quantity supplied exceeds quantity demanded. Too much product, not enough buyers at that price.
- T
- tariff
- A tax on imported goods. Raises the price of imports, protecting domestic producers but hurting consumers.
- terms of trade
- The price at which two parties agree to trade. Must fall between their opportunity costs for both sides to benefit.
Where these terms show up
Every AP Macroeconomics term below belongs to one of the units on the exam. Each unit page has sample questions that put the vocabulary to work:
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