AP Macroeconomics: 250 Key Terms and Their Directions

Most free-response points come from naming a direction and a mechanism, not from a number.

250 cardsLast updated 2026-08-30

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The hard part of macro is not the vocabulary. It is knowing which way a curve moves and why. A student who can define crowding out still loses the point if they cannot say that government borrowing raises the real interest rate, which lowers investment, which offsets part of the fiscal expansion. The same is true of a supply shock: prices and output move in opposite directions, so no single demand policy fixes both, and the question is which one you are willing to give up. This deck is 250 cards, one term per card, with the back giving the definition and, where it applies, a line on why it matters: the direction it moves in a model. The sections follow the shape of the course: basic concepts, economic indicators, national income and price determination, the financial sector, stabilisation and debt, and the open economy. Numbers are deliberately scarce. Where a figure is part of a definition, such as the components of GDP or the money multiplier, it is on the card. Where it is a country's current statistic, it is not, because a memorised figure goes stale while the mechanism does not. Once the deck is on a spaced-repetition schedule, the terms you can already place stop coming back and the ones whose direction you keep reversing return until they stop being a coin flip.

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What's inside

Showing 100 representative cards from the full 250-card deck.

Front	Back
Scarcity — what is it?	The condition that wants exceed the resources available to satisfy them. It is why every economy must choose, and why every choice has a cost.
Trade-off — what is it?	Giving up some of one thing to get more of another. Every point on a production possibilities curve represents a trade-off between two goods.
Law of increasing opportunity cost — what is it?	The principle that producing more of one good costs progressively more of the other. It is why the production possibilities curve bows outward from the origin.
Comparative advantage — what is it?	The ability to produce a good at a lower opportunity cost than another producer. It is the basis for gains from trade. Each side specialises where its opportunity cost is lower.
Demand — what is it?	The quantities of a good buyers are willing and able to buy at each price. It slopes downward because of the substitution and income effects.
Substitute goods — what is it?	Goods that can replace each other in use. A rise in the price of one raises demand for the other.
Inferior good — what is it?	A good whose demand falls when income rises. Demand for these goods can rise during a downturn.
Producer surplus — what is it?	The difference between the price sellers receive and the lowest price they would accept. It is the area above the supply curve and below the price.
Price floor — what is it?	A legal minimum price set above equilibrium. It creates a persistent surplus. A minimum wage is a floor in the labour market.
Factors of production — what is it?	The inputs used to produce goods and services: land, labour, capital and entrepreneurship. Each earns a return: rent, wages, interest and profit.
Positive and normative economics — what is it?	Statements about what is, and statements about what ought to be. Positive claims can be tested against data. Normative claims rest on values.
Incentives — what is it?	Rewards or penalties that change how people behave. Policy works by changing incentives, and often produces effects that were not intended.
Human capital — what is it?	The skills, education and health embodied in workers. Investment in it raises labour productivity and long-run growth.
Law of diminishing returns — what is it?	The principle that adding more of one input to fixed inputs eventually yields smaller increases in output. It shapes short-run cost curves and explains why the short-run supply curve slopes up.
Productive efficiency — what is it?	Producing at the lowest possible cost, on the production possibilities curve. Any point on the curve is productively efficient.
Gross domestic product — what is it?	The market value of all final goods and services produced within a country in a period. It is the headline measure of output and the base for growth and per-capita comparisons.
Consumption — what is it?	Household spending on goods and services. It is the largest component of GDP in most economies.
Government purchases — what is it?	Government spending on goods and services. It includes public sector wages and public construction.
Final good — what is it?	A good bought by its end user rather than used to produce something else. Only final goods enter GDP.
Real GDP — what is it?	Output valued at the prices of a fixed base year. It isolates changes in the quantity of output, which is what growth means.
GDP per capita — what is it?	Real GDP divided by population. It is the usual proxy for average living standards across countries.
Consumer price index — what is it?	A measure of the cost of a fixed basket of goods bought by a typical household. It is the standard measure for consumer inflation and for indexing payments.
Disinflation — what is it?	A decline in the rate of inflation while prices are still rising. It is often the goal of contractionary monetary policy.
Stagflation — what is it?	The combination of high inflation and high unemployment. It follows a negative supply shock, which moves prices and output in opposite directions.
Fisher effect — what is it?	The relationship stating that the nominal rate equals the real rate plus expected inflation. It explains why nominal rates rise when inflation is expected to rise.
Shoe-leather costs — what is it?	The resources spent minimising cash holdings when inflation is high. They rise as inflation raises the cost of holding money.
Labour force — what is it?	People of working age who are employed or actively seeking work. It is the denominator of the unemployment rate.
Labour force participation rate — what is it?	The labour force divided by the working-age population. It shows how many people are engaged with the labour market at all.
Frictional unemployment — what is it?	Short-term joblessness while people move between jobs or enter the market. It exists even in a healthy economy and reflects normal search time.
Cyclical unemployment — what is it?	Joblessness caused by a downturn in aggregate demand. It rises in recessions and falls in expansions. It is what stabilisation policy targets.
Business cycle — what is it?	The pattern of expansion, peak, contraction and trough in real output. Unemployment falls in expansions and rises in contractions.
Recessionary gap — what is it?	The amount by which actual output falls short of full employment output. Unemployment sits above the natural rate. Expansionary policy is the usual response.
Okun's law — what is it?	The empirical relationship between the output gap and the unemployment rate. Output roughly two to three percent below potential accompanies unemployment one point above the natural rate.
Real wage — what is it?	The nominal wage adjusted for the price level. It measures the purchasing power of pay and drives labour supply decisions.
Aggregate demand — what is it?	The total quantity of real output buyers want at each price level. It is the sum of consumption, investment, government purchases and net exports.
Exchange rate effect — what is it?	The channel by which a lower price level makes domestic goods cheaper abroad and raises net exports. It is the third reason aggregate demand slopes downward.
Consumer confidence — what is it?	Households' expectations about future income and employment. Higher confidence raises consumption and shifts aggregate demand right.
Short-run aggregate supply — what is it?	The total output firms produce at each price level while input prices are fixed. It slopes upward because nominal wages and other input prices adjust slowly.
Shifters of short-run aggregate supply — what is it?	Anything that changes production costs at a given price level. Nominal wages, input prices, productivity, business taxes and inflation expectations all shift it.
Long-run equilibrium — what is it?	The point where aggregate demand, short-run aggregate supply and long-run aggregate supply all meet. Output equals potential and unemployment sits at its natural rate.
Marginal propensity to consume — what is it?	The fraction of an additional unit of disposable income that is spent. It determines the size of the spending multiplier.
Spending multiplier — what is it?	The factor by which a change in autonomous spending changes equilibrium output. It equals one divided by the marginal propensity to save.
Balanced budget multiplier — what is it?	The effect of raising spending and taxes by the same amount. The net effect is positive and equals one, because spending affects output more strongly than taxes.
Crowding out — what is it?	The reduction in private investment caused by government borrowing raising interest rates. It weakens the effect of expansionary fiscal policy.
Wage price spiral — what is it?	A cycle in which rising prices lead to higher wage demands, which raise costs and prices again. It makes inflation persistent once it becomes expected.
Rational expectations — what is it?	Forming expectations using all available information, including knowledge of policy. It implies anticipated policy has little effect on real output.
Short-run Phillips curve — what is it?	The downward-sloping relationship between inflation and unemployment at given expectations. A demand shift moves the economy along it. A supply shock shifts it.
Disinflation and the Phillips curve — what is it?	The path the economy follows when policy reduces inflation. Unemployment rises above the natural rate until expectations fall and the curve shifts down.
Demand shock — what is it?	A sudden shift in aggregate demand. It moves output and the price level in the same direction.
Real business cycle view — what is it?	The view that fluctuations come mainly from shocks to productivity rather than to demand. It implies stabilisation policy has limited value.
Keynesian view — what is it?	The view that prices and wages are sticky, so demand shortfalls cause lasting unemployment. It supports active fiscal and monetary policy to close output gaps.
Classical range — what is it?	The vertical portion of the aggregate supply curve at full capacity. Demand increases raise prices with no rise in output.
Potential output — what is it?	The output an economy can sustain without accelerating inflation. It is set by resources, technology and institutions, not by demand.
Nominal rigidity — what is it?	The slow adjustment of prices and wages stated in money terms. It is the reason demand changes affect real output in the short run.
Simultaneous shifts — what is it?	What happens when aggregate demand and short-run aggregate supply move at the same time. One of price level or output is determinate and the other is ambiguous.
Functions of money — what is it?	Serving as a medium of exchange, a unit of account and a store of value. The medium of exchange function is what removes the need for a double coincidence of wants.
M1 — what is it?	The narrowest common measure of the money supply. It covers currency in circulation, chequable deposits and other liquid balances.
Liquidity — what is it?	How easily an asset can be turned into a medium of exchange without loss of value. Cash is the most liquid asset. Property is among the least.
Fractional reserve banking — what is it?	A system in which banks hold only part of deposits as reserves and lend the rest. It is what allows the banking system to create money.
Excess reserves — what is it?	Reserves a bank holds beyond the required amount. They are the funds available for new lending.
Demand for money — what is it?	The amount of wealth people wish to hold in liquid form at each interest rate. It slopes down because the interest rate is the opportunity cost of holding money.
Money market equilibrium — what is it?	The nominal interest rate at which money demanded equals money supplied. An excess supply of money pushes the rate down until people are willing to hold it.
Central bank — what is it?	The institution responsible for monetary policy and the stability of the financial system. It controls the money supply and acts as lender of last resort.
Interest on reserves — what is it?	The rate the central bank pays banks on reserve balances. Raising it encourages banks to hold reserves rather than lend, tightening policy.
Transmission mechanism — what is it?	The chain from a policy change to output and prices. A change in reserves moves the interest rate, then investment, then aggregate demand and output.
Velocity of money — what is it?	The average number of times a unit of money is spent in a period. It links the money supply to nominal output.
Fiscal policy — what is it?	Government use of spending and taxation to affect aggregate demand. It is decided by the legislature rather than the central bank.
Contractionary fiscal policy — what is it?	Cutting government spending or raising taxes to close an inflationary gap. It shifts aggregate demand left, reducing inflationary pressure.
Budget deficit — what is it?	The amount by which government spending exceeds revenue in a period. It must be financed by borrowing, which adds to demand in the loanable funds market.
National debt — what is it?	The accumulated total of past deficits less past surpluses. It is usually assessed relative to GDP rather than in absolute terms.
Supply-side policy — what is it?	Policy aimed at raising long-run aggregate supply rather than demand. Investment in infrastructure, education and research shifts the long-run curve right.
Policy mix — what is it?	The combination of fiscal and monetary policy in use at the same time. Expansionary fiscal with tight monetary policy raises interest rates and shifts spending away from investment.
Debt service — what is it?	Interest payments on outstanding government debt. Rising interest rates raise it and squeeze other spending.
Twin deficits — what is it?	The tendency for budget deficits and trade deficits to move together. Government borrowing raises interest rates, attracts foreign capital, appreciates the currency and reduces net exports.
Inflation targeting — what is it?	A framework in which the central bank commits publicly to a numerical inflation goal. It anchors expectations, which makes the short-run Phillips curve more favourable.
Taylor rule — what is it?	A formula setting the policy rate from inflation and the output gap. It gives a benchmark against which actual policy can be judged.
Zero lower bound — what is it?	The limit below which nominal interest rates cannot easily be cut. It removes the usual monetary tool and makes fiscal policy relatively more powerful.
Indexation — what is it?	Automatically adjusting wages, benefits or contracts to a price index. It protects real values from unexpected inflation.
Policy credibility — what is it?	The extent to which the public believes announced policy will be carried out. Credible disinflation lowers the sacrifice ratio because expectations adjust faster.
Recognition lag — what is it?	The delay before policymakers know a shock has occurred. Data arrive late and are revised, so the state of the economy is uncertain in real time.
Fine-tuning — what is it?	Attempting to offset every small fluctuation with policy. It is generally regarded as impractical because of lags and uncertainty.
Deficit financing — what is it?	Funding a budget deficit by issuing government debt. It raises demand in the loanable funds market and can push up real interest rates.
Debt-to-GDP ratio — what is it?	Government debt expressed as a share of annual output. It is the standard measure of the burden, because output is what services the debt.
Interest growth differential — what is it?	The gap between the interest rate on debt and the growth rate of output. When growth exceeds the interest rate, the debt ratio falls even with a small deficit.
Austerity — what is it?	Reducing deficits by cutting spending or raising taxes. It reduces aggregate demand, which lowers output in the short run.
Transfer payment — what is it?	A government payment made without any good or service in exchange. Pensions and unemployment benefits are examples. They affect demand through recipients' spending.
Proportional tax — what is it?	A tax taking the same share of income at every level. It is often called a flat tax.
Disposable income — what is it?	Income remaining after taxes and including transfers. It is the income households actually allocate between consumption and saving.
Public saving — what is it?	Government revenue minus government spending. It is positive with a surplus and negative with a deficit.
Balance of payments — what is it?	A record of all transactions between a country and the rest of the world. It is divided into the current account and the financial account.
Financial account — what is it?	The record of purchases and sales of assets across borders. A current account deficit is financed by a financial account surplus.
Net capital outflow — what is it?	Domestic purchases of foreign assets minus foreign purchases of domestic assets. It equals net exports in the national accounts.
Exchange rate — what is it?	The price of one currency in terms of another. It is determined in the foreign exchange market by supply and demand for currencies.
Devaluation — what is it?	A deliberate reduction of a fixed exchange rate by the authorities. It is used to restore competitiveness under a peg.
Managed float — what is it?	A regime in which the rate mainly floats but authorities intervene at times. It aims to smooth volatility without committing to a level.
Supply of a currency — what is it?	The amount of a currency offered in exchange for foreign currency. It rises when residents buy imports or foreign assets.
Purchasing power parity — what is it?	The idea that exchange rates should equalise the price of the same basket across countries. It is a useful long-run benchmark for whether a currency is over or undervalued.
Currency reserves — what is it?	Foreign currency assets held by a central bank. They are used to intervene in the foreign exchange market and defend a peg.
Tariff — what is it?	A tax on imported goods. It raises the domestic price, protects domestic producers and raises revenue.
Gains from trade — what is it?	The increase in total consumption made possible by specialisation and exchange. They arise from differences in opportunity cost between producers.

Frequently asked

What is in each section of the deck?

Basic concepts has 35 cards, economic indicators 45, national income and price determination 45, the financial sector 50, stabilisation and debt 40, and the open economy 35, for 250 in total. Every card carries section and subtopic tags, so you can drill only the money market, only fiscal policy, or only the external accounts.

Does the deck cover graphs and models?

It covers what the graphs mean rather than the drawings themselves. Cards state which curve shifts, in which direction, and what happens to output and the price level, including the cases where the result is genuinely ambiguous because two curves move at once. Drawing practice still has to happen on paper, but the direction and the mechanism are here.

Is this useful outside the AP course?

Yes. The vocabulary is standard introductory macroeconomics, so it transfers to a first university course or to reading economic coverage. The section order follows the AP units, which makes it easy to align with a class, but nothing on the cards depends on the exam format.

Can I import the whole deck on the free plan?

Yes. Importing a saved deck runs no new AI generation and does not use your AI allowance, so the free plan imports all 250 cards. You can study, edit and delete them afterwards.

Will importing it twice create duplicates?

No. Cards you already have are skipped and only cards added in a revision come through. Including re-imports after deleting it, one official deck can be imported three times per account.

Can I use it on the web and in the mobile app?

Yes. The deck is added to your account rather than to a device, so the same cards and the same progress are there on the web, on iOS and on Android.

Can I edit the cards after importing?

Yes. Imported cards are yours: you can edit both sides, delete cards you do not need, change tags, and move cards to another deck.