AP Macroeconomics key terms

The condition in which available resources are limited relative to the unlimited wants of people, forcing individuals and societies to make choices about how to allocate what exists.

The value of the next best alternative given up when a choice is made; it is measured by what must be sacrificed, not by the money price paid.

A graph showing the maximum combinations of two goods an economy can produce when all resources are fully and efficiently employed, given current technology.

The ability of a producer to make a good at a lower opportunity cost than another producer, which is the basis for mutually beneficial specialization and trade.

The ability of a producer to make more of a good with the same resources, or to use fewer resources to make a given amount, than another producer.

The rate at which one good trades for another between two parties; for mutually beneficial exchange it must lie between the two parties' internal opportunity costs.

The various quantities of a good that buyers are willing and able to purchase at different prices during a given period, all other influences held constant.

The principle that, other things equal, quantity demanded falls as price rises and rises as price falls, producing a downward-sloping demand curve.

The various quantities of a good that sellers are willing and able to offer at different prices during a given period, all other influences held constant.

The principle that, other things equal, quantity supplied rises as price rises and falls as price falls, producing an upward-sloping supply curve.

The price at which quantity demanded equals quantity supplied, so the market clears with no tendency for price to change; also called the market-clearing price.

A situation in which quantity demanded exceeds quantity supplied at a price below equilibrium, which typically pushes the price upward toward equilibrium.

A situation in which quantity supplied exceeds quantity demanded at a price above equilibrium, which typically pushes the price downward toward equilibrium.

A legally imposed maximum price, which is binding only when set below equilibrium and tends to create shortages and non-price rationing.

A legally imposed minimum price, which is binding only when set above equilibrium and tends to create surpluses, as with a minimum wage.

A measure of how responsive quantity demanded is to a change in price, calculated as the percentage change in quantity demanded divided by the percentage change in price.

A method for judging elasticity: if price and total revenue move in opposite directions demand is elastic, and if they move in the same direction demand is inelastic.

A good whose demand increases when consumer income rises and decreases when income falls, so that income and demand move in the same direction.

A good whose demand falls when consumer income rises and rises when income falls, so that income and demand move in opposite directions.

The total market value of all final goods and services produced within a country's borders during a given period, usually one year or one quarter.

The value of final output measured at the prices prevailing in the year of production, so it changes with both output and the price level.

The value of final output measured at constant base-year prices, used to compare output across years because it removes the effect of price changes.

A price index computed as nominal GDP divided by real GDP, multiplied by 100, that measures the average price level of all goods in GDP.

A measure of the average price of a fixed market basket of goods and services purchased by a typical urban household, expressed relative to a base year.

The percentage change in a price index from one period to the next, indicating how quickly the overall price level is rising.

The percentage of the labor force that is jobless and actively seeking work, calculated as unemployed persons divided by the labor force times 100.

The percentage of the civilian noninstitutional population that is either employed or actively looking for work.

The unemployment rate that persists when the economy is at full employment, consisting of frictional and structural unemployment but excluding cyclical unemployment.

Joblessness caused by a downturn in the business cycle, when total spending falls short of what is needed to employ all willing workers.

The total quantity of real output that households, firms, government, and foreign buyers are willing to purchase at each price level, other things equal.

The total quantity of real output that firms are willing to produce and sell at each price level, with a short-run curve that slopes upward and a long-run curve that is vertical at potential output.

The price level and real output at which aggregate demand equals short-run aggregate supply, which may lie above or below potential output.

The price level and output at which aggregate demand equals long-run aggregate supply, so the economy produces at potential output with no output gap.

The amount by which actual short-run equilibrium output falls short of potential output, associated with high unemployment and downward pressure on prices.

The amount by which actual short-run equilibrium output exceeds potential output, associated with low unemployment and upward pressure on the price level.

Deliberate changes in government spending and taxation intended to influence aggregate demand, output, and employment.

The process by which an initial change in spending produces a larger ultimate change in real GDP, because each round of spending becomes income for someone else.

The fraction of an additional dollar of disposable income that households spend on consumption, calculated as the change in consumption divided by the change in income.

The fraction of an additional dollar of disposable income that households save, equal to one minus the marginal propensity to consume.

The reduction in private investment that occurs when government borrowing to finance deficits raises interest rates and absorbs loanable funds.

Actions by a central bank to change the money supply and interest rates in order to influence aggregate demand, output, and the price level.

The buying and selling of government securities by a central bank, the most frequently used tool for changing bank reserves and the money supply.

The minimum fraction of checkable deposits that banks must hold as reserves rather than lend out, set by the central bank.

The maximum multiple by which the banking system can expand checkable deposits from a given increase in reserves, equal to one divided by the required reserve ratio.

The market in which savers supply funds and borrowers demand funds, with the interest rate adjusting to balance the two.

The nominal interest rate minus the expected inflation rate, reflecting the true cost of borrowing and the true return to lending in purchasing power.

A curve showing the short-run inverse relationship between the unemployment rate and the inflation rate, which shifts when expectations or supply conditions change.

A sustained increase in a country's real output per person over time, driven by more or better resources, capital accumulation, and technological progress.

A policy that increases aggregate demand, such as raising government spending, cutting taxes, or lowering interest rates, used to close a recessionary gap.

A policy that reduces aggregate demand, such as cutting government spending, raising taxes, or raising interest rates, used to fight inflation.

A significant decline in economic activity spread across the economy and lasting more than a few months, visible in falling real GDP and rising unemployment.