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 cut into three fixed lines. "Meaning" defines the term in a sentence. "Why it matters" gives the direction it moves in a model. "Watch for" names the confusion that costs the point. 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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Showing 100 representative cards from the full 250-card deck.

Front	Back
Scarcity	Meaning: The condition that wants exceed the resources available to satisfy them. Why it matters: It is why every economy must choose, and why every choice has a cost. Example: A shortage is a market condition at one price. Scarcity is permanent and applies to every good.
Trade-off	Meaning: Giving up some of one thing to get more of another. Why it matters: Every point on a production possibilities curve represents a trade-off between two goods. Example: A trade-off names what is given up. Opportunity cost puts a value on it.
Law of increasing opportunity cost	Meaning: The principle that producing more of one good costs progressively more of the other. Why it matters: It is why the production possibilities curve bows outward from the origin. Example: A straight-line curve means resources are perfectly adaptable, which is a simplification rather than the usual case.
Comparative advantage	Meaning: The ability to produce a good at a lower opportunity cost than another producer. Why it matters: It is the basis for gains from trade. Each side specialises where its opportunity cost is lower. Example: A country can hold an absolute advantage in everything and still gain by trading.
Demand	Meaning: The quantities of a good buyers are willing and able to buy at each price. Why it matters: It slopes downward because of the substitution and income effects. Example: A change in price moves along the curve. Only other factors shift the whole curve.
Substitute goods	Meaning: Goods that can replace each other in use. Why it matters: A rise in the price of one raises demand for the other. Example: The relationship shifts the other good's demand curve. It does not move along it.
Inferior good	Meaning: A good whose demand falls when income rises. Why it matters: Demand for these goods can rise during a downturn. Example: Inferior does not mean low quality. It refers only to how demand responds to income.
Producer surplus	Meaning: The difference between the price sellers receive and the lowest price they would accept. Why it matters: It is the area above the supply curve and below the price. Example: It is not the same as profit. Fixed costs are not deducted here.
Price floor	Meaning: A legal minimum price set above equilibrium. Why it matters: It creates a persistent surplus. A minimum wage is a floor in the labour market. Example: A floor below equilibrium is not binding and has no effect.
Factors of production	Meaning: The inputs used to produce goods and services: land, labour, capital and entrepreneurship. Why it matters: Each earns a return: rent, wages, interest and profit. Example: Money is not capital in this sense. Capital means produced tools and equipment.
Positive and normative economics	Meaning: Statements about what is, and statements about what ought to be. Why it matters: Positive claims can be tested against data. Normative claims rest on values. Example: A precise-sounding claim can still be normative. The test is whether evidence could settle it.
Incentives	Meaning: Rewards or penalties that change how people behave. Why it matters: Policy works by changing incentives, and often produces effects that were not intended. Example: Incentives include non-monetary ones. Reducing them to prices misses part of the response.
Human capital	Meaning: The skills, education and health embodied in workers. Why it matters: Investment in it raises labour productivity and long-run growth. Example: It is not counted as physical capital. Both raise output but through different channels.
Law of diminishing returns	Meaning: The principle that adding more of one input to fixed inputs eventually yields smaller increases in output. Why it matters: It shapes short-run cost curves and explains why the short-run supply curve slopes up. Example: It applies only when at least one input is fixed. It is a short-run idea.
Productive efficiency	Meaning: Producing at the lowest possible cost, on the production possibilities curve. Why it matters: Any point on the curve is productively efficient. Example: Being on the curve does not mean the right goods are being made. That is allocative efficiency.
Gross domestic product	Meaning: The market value of all final goods and services produced within a country in a period. Why it matters: It is the headline measure of output and the base for growth and per-capita comparisons. Example: Only final goods count. Adding intermediate goods would double-count the same output.
Consumption	Meaning: Household spending on goods and services. Why it matters: It is the largest component of GDP in most economies. Example: Buying a newly built house counts as investment, not consumption.
Government purchases	Meaning: Government spending on goods and services. Why it matters: It includes public sector wages and public construction. Example: Social payments and interest on debt are excluded. They are transfers, not purchases.
Final good	Meaning: A good bought by its end user rather than used to produce something else. Why it matters: Only final goods enter GDP. Example: The same physical good can be intermediate or final depending on who buys it and why.
Real GDP	Meaning: Output valued at the prices of a fixed base year. Why it matters: It isolates changes in the quantity of output, which is what growth means. Example: In the base year real and nominal are equal by construction.
GDP per capita	Meaning: Real GDP divided by population. Why it matters: It is the usual proxy for average living standards across countries. Example: It says nothing about distribution. Two countries with the same figure can differ greatly.
Consumer price index	Meaning: A measure of the cost of a fixed basket of goods bought by a typical household. Why it matters: It is the standard measure for consumer inflation and for indexing payments. Example: The fixed basket makes it overstate inflation somewhat, because buyers substitute away from what rises.
Disinflation	Meaning: A decline in the rate of inflation while prices are still rising. Why it matters: It is often the goal of contractionary monetary policy. Example: Prices do not fall during disinflation. The confusion with deflation is common.
Stagflation	Meaning: The combination of high inflation and high unemployment. Why it matters: It follows a negative supply shock, which moves prices and output in opposite directions. Example: It cannot be produced by a demand shift, which moves them together.
Fisher effect	Meaning: The relationship stating that the nominal rate equals the real rate plus expected inflation. Why it matters: It explains why nominal rates rise when inflation is expected to rise. Example: It uses expected inflation, not the rate that turned out to happen.
Shoe-leather costs	Meaning: The resources spent minimising cash holdings when inflation is high. Why it matters: They rise as inflation raises the cost of holding money. Example: They are a real cost even when inflation is fully anticipated.
Labour force	Meaning: People of working age who are employed or actively seeking work. Why it matters: It is the denominator of the unemployment rate. Example: Those not seeking work are outside the labour force, so they are not counted as unemployed.
Labour force participation rate	Meaning: The labour force divided by the working-age population. Why it matters: It shows how many people are engaged with the labour market at all. Example: It moves for demographic reasons as well as cyclical ones. A change is not always about the cycle.
Frictional unemployment	Meaning: Short-term joblessness while people move between jobs or enter the market. Why it matters: It exists even in a healthy economy and reflects normal search time. Example: It is not a sign of weakness. Some of it is needed for good job matching.
Cyclical unemployment	Meaning: Joblessness caused by a downturn in aggregate demand. Why it matters: It rises in recessions and falls in expansions. It is what stabilisation policy targets. Example: It is the only type that policy can reliably reduce in the short run.
Business cycle	Meaning: The pattern of expansion, peak, contraction and trough in real output. Why it matters: Unemployment falls in expansions and rises in contractions. Example: The cycle is not regular. Its phases have no fixed length.
Recessionary gap	Meaning: The amount by which actual output falls short of full employment output. Why it matters: Unemployment sits above the natural rate. Expansionary policy is the usual response. Example: The gap is measured in output, and the corresponding policy change is smaller because of the multiplier.
Okun's law	Meaning: The empirical relationship between the output gap and the unemployment rate. Why it matters: Output roughly two to three percent below potential accompanies unemployment one point above the natural rate. Example: It is a regularity, not an identity. It does not hold exactly in every episode.
Real wage	Meaning: The nominal wage adjusted for the price level. Why it matters: It measures the purchasing power of pay and drives labour supply decisions. Example: A rising nominal wage can be a falling real wage when inflation is faster.
Aggregate demand	Meaning: The total quantity of real output buyers want at each price level. Why it matters: It is the sum of consumption, investment, government purchases and net exports. Example: It slopes down for different reasons than a single market's demand curve. Income is not held constant here.
Exchange rate effect	Meaning: The channel by which a lower price level makes domestic goods cheaper abroad and raises net exports. Why it matters: It is the third reason aggregate demand slopes downward. Example: It operates through relative prices between countries, not through the money market.
Consumer confidence	Meaning: Households' expectations about future income and employment. Why it matters: Higher confidence raises consumption and shifts aggregate demand right. Example: Expectations move spending before any income actually changes.
Short-run aggregate supply	Meaning: The total output firms produce at each price level while input prices are fixed. Why it matters: It slopes upward because nominal wages and other input prices adjust slowly. Example: It shifts when input prices, productivity or expectations change, not when the price level changes.
Shifters of short-run aggregate supply	Meaning: Anything that changes production costs at a given price level. Why it matters: Nominal wages, input prices, productivity, business taxes and inflation expectations all shift it. Example: Its own price level does not shift it. That is a movement along the curve.
Long-run equilibrium	Meaning: The point where aggregate demand, short-run aggregate supply and long-run aggregate supply all meet. Why it matters: Output equals potential and unemployment sits at its natural rate. Example: Reaching it requires wage adjustment, which takes time.
Marginal propensity to consume	Meaning: The fraction of an additional unit of disposable income that is spent. Why it matters: It determines the size of the spending multiplier. Example: It is a fraction of the change in income, not a fraction of total income.
Spending multiplier	Meaning: The factor by which a change in autonomous spending changes equilibrium output. Why it matters: It equals one divided by the marginal propensity to save. Example: A larger propensity to save gives a smaller multiplier. The relationship is inverse.
Balanced budget multiplier	Meaning: The effect of raising spending and taxes by the same amount. Why it matters: The net effect is positive and equals one, because spending affects output more strongly than taxes. Example: Equal changes do not cancel. The two multipliers differ in size.
Crowding out	Meaning: The reduction in private investment caused by government borrowing raising interest rates. Why it matters: It weakens the effect of expansionary fiscal policy. Example: It is smaller when the economy is deep in recession and interest rates are already low.
Wage price spiral	Meaning: A cycle in which rising prices lead to higher wage demands, which raise costs and prices again. Why it matters: It makes inflation persistent once it becomes expected. Example: It requires expectations to adjust. A one-off price rise does not start a spiral by itself.
Rational expectations	Meaning: Forming expectations using all available information, including knowledge of policy. Why it matters: It implies anticipated policy has little effect on real output. Example: It does not mean people are never wrong. It means they do not make the same mistake systematically.
Short-run Phillips curve	Meaning: The downward-sloping relationship between inflation and unemployment at given expectations. Why it matters: A demand shift moves the economy along it. A supply shock shifts it. Example: Higher expected inflation shifts the whole curve up, worsening the available combinations.
Disinflation and the Phillips curve	Meaning: The path the economy follows when policy reduces inflation. Why it matters: Unemployment rises above the natural rate until expectations fall and the curve shifts down. Example: The cost depends on how quickly expectations adjust. Credible policy makes it cheaper.
Demand shock	Meaning: A sudden shift in aggregate demand. Why it matters: It moves output and the price level in the same direction. Example: The common direction is what distinguishes it from a supply shock.
Real business cycle view	Meaning: The view that fluctuations come mainly from shocks to productivity rather than to demand. Why it matters: It implies stabilisation policy has limited value. Example: It treats observed output as close to potential, which is what makes its policy conclusions different.
Keynesian view	Meaning: The view that prices and wages are sticky, so demand shortfalls cause lasting unemployment. Why it matters: It supports active fiscal and monetary policy to close output gaps. Example: It concerns the short run. Most versions agree the long-run curve is vertical.
Classical range	Meaning: The vertical portion of the aggregate supply curve at full capacity. Why it matters: Demand increases raise prices with no rise in output. Example: Which range applies depends on where output stands relative to potential.
Potential output	Meaning: The output an economy can sustain without accelerating inflation. Why it matters: It is set by resources, technology and institutions, not by demand. Example: Exceeding it is possible for a while, but not sustainable.
Nominal rigidity	Meaning: The slow adjustment of prices and wages stated in money terms. Why it matters: It is the reason demand changes affect real output in the short run. Example: Without it the short-run and long-run supply curves would coincide.
Simultaneous shifts	Meaning: What happens when aggregate demand and short-run aggregate supply move at the same time. Why it matters: One of price level or output is determinate and the other is ambiguous. Example: The ambiguity is a real result. Asserting both directions without magnitudes is an error.
Functions of money	Meaning: Serving as a medium of exchange, a unit of account and a store of value. Why it matters: The medium of exchange function is what removes the need for a double coincidence of wants. Example: Money is a poor store of value under high inflation, yet it still works as a medium of exchange.
M1	Meaning: The narrowest common measure of the money supply. Why it matters: It covers currency in circulation, chequable deposits and other liquid balances. Example: Liquidity is what determines inclusion, not whether an asset is valuable.
Liquidity	Meaning: How easily an asset can be turned into a medium of exchange without loss of value. Why it matters: Cash is the most liquid asset. Property is among the least. Example: Liquidity is not the same as value. A valuable asset can be very illiquid.
Fractional reserve banking	Meaning: A system in which banks hold only part of deposits as reserves and lend the rest. Why it matters: It is what allows the banking system to create money. Example: Banks cannot repay all depositors at once. That is why deposit insurance and a lender of last resort exist.
Excess reserves	Meaning: Reserves a bank holds beyond the required amount. Why it matters: They are the funds available for new lending. Example: Large excess reserves weaken the transmission of monetary policy, because banks are not lending them out.
Demand for money	Meaning: The amount of wealth people wish to hold in liquid form at each interest rate. Why it matters: It slopes down because the interest rate is the opportunity cost of holding money. Example: It shifts with the price level and real income, not with the interest rate.
Money market equilibrium	Meaning: The nominal interest rate at which money demanded equals money supplied. Why it matters: An excess supply of money pushes the rate down until people are willing to hold it. Example: This market sets the nominal rate. The loanable funds market sets the real rate.
Central bank	Meaning: The institution responsible for monetary policy and the stability of the financial system. Why it matters: It controls the money supply and acts as lender of last resort. Example: It is not part of the fiscal authority. Its actions are not government spending.
Interest on reserves	Meaning: The rate the central bank pays banks on reserve balances. Why it matters: Raising it encourages banks to hold reserves rather than lend, tightening policy. Example: It works by changing the incentive to lend, not by changing the quantity of reserves.
Transmission mechanism	Meaning: The chain from a policy change to output and prices. Why it matters: A change in reserves moves the interest rate, then investment, then aggregate demand and output. Example: Every link can weaken. A rate cut does not raise spending if firms will not borrow.
Velocity of money	Meaning: The average number of times a unit of money is spent in a period. Why it matters: It links the money supply to nominal output. Example: It is not constant. Treating it as fixed is what makes the quantity theory a strong claim.
Fiscal policy	Meaning: Government use of spending and taxation to affect aggregate demand. Why it matters: It is decided by the legislature rather than the central bank. Example: It works through spending and taxes. Changing the money supply is monetary policy.
Contractionary fiscal policy	Meaning: Cutting government spending or raising taxes to close an inflationary gap. Why it matters: It shifts aggregate demand left, reducing inflationary pressure. Example: The required change is smaller than the gap, because the multiplier amplifies it.
Budget deficit	Meaning: The amount by which government spending exceeds revenue in a period. Why it matters: It must be financed by borrowing, which adds to demand in the loanable funds market. Example: It is a flow measured over a period. Debt is the stock that accumulates.
National debt	Meaning: The accumulated total of past deficits less past surpluses. Why it matters: It is usually assessed relative to GDP rather than in absolute terms. Example: A rising debt level with falling debt relative to output is not obviously worse. The ratio is what matters.
Supply-side policy	Meaning: Policy aimed at raising long-run aggregate supply rather than demand. Why it matters: Investment in infrastructure, education and research shifts the long-run curve right. Example: Its effects are slow. It is not a tool for closing a current output gap.
Policy mix	Meaning: The combination of fiscal and monetary policy in use at the same time. Why it matters: Expansionary fiscal with tight monetary policy raises interest rates and shifts spending away from investment. Example: The two can offset each other. The stance of one alone does not describe the situation.
Debt service	Meaning: Interest payments on outstanding government debt. Why it matters: Rising interest rates raise it and squeeze other spending. Example: It is a transfer rather than a purchase, so it is not part of government purchases in GDP.
Twin deficits	Meaning: The tendency for budget deficits and trade deficits to move together. Why it matters: Government borrowing raises interest rates, attracts foreign capital, appreciates the currency and reduces net exports. Example: The link runs through the exchange rate. It is not an accounting identity.
Inflation targeting	Meaning: A framework in which the central bank commits publicly to a numerical inflation goal. Why it matters: It anchors expectations, which makes the short-run Phillips curve more favourable. Example: A target is not a ceiling. Undershooting it is also a policy failure.
Taylor rule	Meaning: A formula setting the policy rate from inflation and the output gap. Why it matters: It gives a benchmark against which actual policy can be judged. Example: It is a guide, not a mechanism. Central banks depart from it deliberately.
Zero lower bound	Meaning: The limit below which nominal interest rates cannot easily be cut. Why it matters: It removes the usual monetary tool and makes fiscal policy relatively more powerful. Example: Modestly negative rates have been used, so the bound is a practical limit rather than an absolute one.
Indexation	Meaning: Automatically adjusting wages, benefits or contracts to a price index. Why it matters: It protects real values from unexpected inflation. Example: It also makes inflation more persistent by feeding price rises straight into costs.
Policy credibility	Meaning: The extent to which the public believes announced policy will be carried out. Why it matters: Credible disinflation lowers the sacrifice ratio because expectations adjust faster. Example: It is built over time and lost quickly. A single reversal is costly.
Recognition lag	Meaning: The delay before policymakers know a shock has occurred. Why it matters: Data arrive late and are revised, so the state of the economy is uncertain in real time. Example: This lag applies to both fiscal and monetary policy.
Fine-tuning	Meaning: Attempting to offset every small fluctuation with policy. Why it matters: It is generally regarded as impractical because of lags and uncertainty. Example: The argument against it is not that policy never works. It is that timing cannot be that precise.
Deficit financing	Meaning: Funding a budget deficit by issuing government debt. Why it matters: It raises demand in the loanable funds market and can push up real interest rates. Example: The effect on rates is small when private demand for funds is weak.
Debt-to-GDP ratio	Meaning: Government debt expressed as a share of annual output. Why it matters: It is the standard measure of the burden, because output is what services the debt. Example: The ratio can fall while debt rises, provided output grows faster.
Interest growth differential	Meaning: The gap between the interest rate on debt and the growth rate of output. Why it matters: When growth exceeds the interest rate, the debt ratio falls even with a small deficit. Example: This is what decides sustainability. The size of the deficit alone does not.
Austerity	Meaning: Reducing deficits by cutting spending or raising taxes. Why it matters: It reduces aggregate demand, which lowers output in the short run. Example: It can raise the debt ratio in the short run when output falls faster than debt.
Transfer payment	Meaning: A government payment made without any good or service in exchange. Why it matters: Pensions and unemployment benefits are examples. They affect demand through recipients' spending. Example: They are excluded from government purchases in GDP. Counting them twice is a common error.
Proportional tax	Meaning: A tax taking the same share of income at every level. Why it matters: It is often called a flat tax. Example: It is not neutral in effect. Its stabilising power is weaker than a progressive system.
Disposable income	Meaning: Income remaining after taxes and including transfers. Why it matters: It is the income households actually allocate between consumption and saving. Example: The consumption function depends on this, not on pre-tax income.
Public saving	Meaning: Government revenue minus government spending. Why it matters: It is positive with a surplus and negative with a deficit. Example: A deficit is negative public saving, not the absence of it.
Balance of payments	Meaning: A record of all transactions between a country and the rest of the world. Why it matters: It is divided into the current account and the financial account. Example: The two accounts offset each other by construction. A deficit in one is a surplus in the other.
Financial account	Meaning: The record of purchases and sales of assets across borders. Why it matters: A current account deficit is financed by a financial account surplus. Example: An inflow here is a claim by foreigners on domestic assets, not a gift.
Net capital outflow	Meaning: Domestic purchases of foreign assets minus foreign purchases of domestic assets. Why it matters: It equals net exports in the national accounts. Example: It moves with the real interest rate. Higher domestic rates reduce it.
Exchange rate	Meaning: The price of one currency in terms of another. Why it matters: It is determined in the foreign exchange market by supply and demand for currencies. Example: Quoting it in the wrong direction reverses every conclusion. Fix which currency is being priced first.
Devaluation	Meaning: A deliberate reduction of a fixed exchange rate by the authorities. Why it matters: It is used to restore competitiveness under a peg. Example: It is a policy decision. Depreciation is what a floating rate does on its own.
Managed float	Meaning: A regime in which the rate mainly floats but authorities intervene at times. Why it matters: It aims to smooth volatility without committing to a level. Example: Intervention still uses reserves, so it is not free of the constraints of a peg.
Supply of a currency	Meaning: The amount of a currency offered in exchange for foreign currency. Why it matters: It rises when residents buy imports or foreign assets. Example: Higher domestic income raises imports and so raises supply, depreciating the currency.
Purchasing power parity	Meaning: The idea that exchange rates should equalise the price of the same basket across countries. Why it matters: It is a useful long-run benchmark for whether a currency is over or undervalued. Example: It fails in the short run. Non-traded goods and transport costs break the link.
Currency reserves	Meaning: Foreign currency assets held by a central bank. Why it matters: They are used to intervene in the foreign exchange market and defend a peg. Example: They are finite. A peg can be defended only while reserves last.
Tariff	Meaning: A tax on imported goods. Why it matters: It raises the domestic price, protects domestic producers and raises revenue. Example: It creates deadweight loss. Producer and government gains are smaller than the consumer loss.
Gains from trade	Meaning: The increase in total consumption made possible by specialisation and exchange. Why it matters: They arise from differences in opportunity cost between producers. Example: The gains are aggregate. Specific groups can lose even when the country gains overall.

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 spends no AI credits, 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.