Definition of Classical Macroeconomics

Classical Macroeconomics

The school of macroeconomic thought prior to the rise of Keynesianism.

Macroeconomics

The study of the determination of economic aggregates such as total output and the price level.

New Classicals

Economists who, like classical economists, believe that wages and prices are sufficiently flexible to solve the unemployment problem without help from government policy.

Guaranteed Renewal

A promise that a life insurance policy will be renewed without penalty or medical examination after the term has expired. The renewal rate can also be guaranteed.

New-issues market

The market in which a new issue of securities is first sold to investors.

New Keynesians

Economists who, like Keynes, believe that for good reason wages and prices are sticky and so prolong recessions, suggesting a need for government policy.

New money

In a Treasury auction, the amount by which the par value of the securities offered exceeds that of
those maturing.

New York Stock Exchange (NYSE)

Also known as the Big Board or The Exhange. More than 2,00 common
and preferred stocks are traded. The exchange is the older in the United States, founded in 1792, and the
largest. It is lcoated on Wall Street in new York City

Seasoned new issue

A new issue of stock after the company's securities have previously been issued. A
seasoned new issue of common stock can be made by using a cash offer or a rights offer.

Yearly Renewable Term Insurance

Sometimes, simply called YRT, this is a form of term life insurance that may be renewed annually without evidence of insurability to a stated age.

Absolute priority

Rule in bankruptcy proceedings whereby senior creditors are required to be paid in full
before junior creditors receive any payment.

accepted quality level (AQL)

the maximum limit for the number of defects or errors in a process

Accomodating Policy

A monetary policy of matching wage and price increases with money supply increases so that the real money supply does not fall and push the economy into recession.

Accounting insolvency

total liabilities exceed total assets. A firm with a negative net worth is insolvent on
the books.

Agency problem

Conflicts of interest among stockholders, bondholders, and managers.

agency problems

Conflicts of interest between the firm’s owners and managers.

Allocation base A measure of activity or volume such as labour

hours, machine hours or volume of production
used to apportion overheads to products and
services.

Arm's length price

The price at which a willing buyer and a willing unrelated seller would freely agree to
transact.

Ask price

A dealer's price to sell a security; also called the offer price.

Asset substitution problem

Arises when the stockholders substitute riskier assets for the firm's existing
assets and expropriate value from the debtholders.

Bargain-purchase-price option

Gives the lessee the option to purchase the asset at a price below fair market
value when the lease expires.

Basis price

price expressed in terms of yield to maturity or annual rate of return.

batch-level cost

a cost that is caused by a group of things
being made, handled, or processed at a single time

Beggar-My-Neighbor Policy

A policy designed to increase an economy's prosperity at the expense of another country's prosperity.

Bid price

This is the quoted bid, or the highest price an investor is willing to pay to buy a security. Practically
speaking, this is the available price at which an investor can sell shares of stock. Related: Ask , offer.

Call price

The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a
specified call date.

Call price

The price for which a bond can be repaid before maturity under a call provision.

Clean price

Bond price excluding accrued interest.

Coefficient of determination

A measure of the goodness of fit of the relationship between the dependent and
independent variables in a regression analysis; for instance, the percentage of variation in the return of an
asset explained by the market portfolio return.

coefficient of determination

a measure of dispersion that
indicates the “goodness of fit” of the actual observations
to the least squares regression line; indicates what proportion
of the total variation in y is explained by the regression model

Cold-Turkey Policy

Decreasing inflation by immediately decreasing the money growth rate to a new, low rate. Contrast with gradualism.

Collection policy

Procedures followed by a firm in attempting to collect accounts receivables.

collection policy

Procedures to collect and monitor receivables.

Confidence level

The degree of assurance that a specified failure rate is not exceeded.

Consumer Price Index (CPI)

The CPI, as it is called, measures the prices of consumer goods and services and is a
measure of the pace of U.S. inflation. The U.S.Department of Labor publishes the CPI very month.

Consumer Price Index (CPI)

An index calculated by tracking the cost of a typical bundle of consumer goods and services over time. It is commonly used to measure inflation.

Conversion parity price

Related:Market conversion price

Convertible price

The contractually specified price per share at which a convertible security can be
converted into shares of common stock.

credit policy

Standards set to determine the amount and nature of credit to extend to customers.

Cyclical Unemployment

unemployment that increases when the economy enters a recession and decreases when the economy enters a boom.

Delivery policy

A company’s stated goal for how soon a customer order will be
shipped following receipt of that order.

Delivery price

The price fixed by the Clearing house at which deliveries on futures are in invoiced; also the
price at which the futures contract is settled when deliveries are made.

Demand Management Policy

Fiscal or monetary policy designed to influence aggregate demand for goods and services.

Devaluation A decrease in the spot price of the currency

Dirty price

Bond price including accrued interest, i.e., the price paid by the bond buyer.

Discretionary Policy

A policy that is a conscious, considered response to each situation as it arises. Contrast with policy rule.

Dividend policy

An established guide for the firm to determine the amount of money it will pay as dividends.

Dividend Policy

This policy governs Canada Life's actions regarding distribution of dividends to policyholders. It's goal is to achieve a dividend distribution that is equitable and timely, and which gives full recognition of the need to ensure the ongoing solidity of the company. It also specifies that distribution to individual policyholders must be equitable between dividend classes and policyholder generations, and among policyholders within any class.

Dollar price of a bond

Percentage of face value at which a bond is quoted.

Earnings surprises

Positive or negative differences from the consensus forecast of earnings by institutions
such as First Call or IBES. Negative earnings surprises generally have a greater adverse affect on stock prices
than the reciprocal positive earnings surprise on stock prices.

Economic assumptions

economic environment in which the firm expects to reside over the life of the
financial plan.

economic components model

Abrams’ model for calculating DLOM based on the interaction of discounts from four economic components.
This model consists of four components: the measure of the economic impact of the delay-to-sale, monopsony power to buyers, and incremental transactions costs to both buyers and sellers.

Economic defeasance

See: in-substance defeasance.

Economic dependence

Exists when the costs and/or revenues of one project depend on those of another.

Economic earnings

The real flow of cash that a firm could pay out forever in the absence of any change in
the firm's productive capacity.

Economic exposure

The extent to which the value of the firm will change because of an exchange rate change.

Economic income

Cash flow plus change in present value.

economic integration

the creation of multi-country markets
by developing transnational rules that reduce the fiscal and
physical barriers to trade as well as encourage greater economic
cooperation among countries

Economic life

The period over which a company expects to be able to use an asset.

economic order quantity

Order size that minimizes total inventory costs.

Economic order quantity (EOQ)

The order quantity that minimizes total inventory costs.

economic order quantity (EOQ)

an estimate of the number
of units per order that will be the least costly and provide
the optimal balance between the costs of ordering
and the costs of carrying inventory

economic production run (EPR)

an estimate of the number
of units to produce at one time that minimizes the total
costs of setting up production runs and carrying inventory

Economic rents

Profits in excess of the competitive level.

Economic risk

In project financing, the risk that the project's output will not be salable at a price that will
cover the project's operating and maintenance costs and its debt service requirements.

Economic surplus

For any entity, the difference between the market value of all its assets and the market
value of its liabilities.

Economic union

An agreement between two or more countries that allows the free movement of capital,
labor, all goods and services, and involves the harmonization and unification of social, fiscal, and monetary
policies.

Economic Value Added (EVA)

Operating profit, adjusted to remove distortions caused by certain accounting rules, less a charge
to cover the cost of capital invested in the business.

economic value added (EVA)

a measure of the extent to which income exceeds the dollar cost of capital; calculated
as income minus (invested capital times the cost of capital percentage)

economic value added (EVA)

Term used by the consulting firm Stern Stewart for profit remaining after deduction of the cost
of the capital employed.

economically reworked

when the incremental revenue from the sale of reworked defective units is greater than
the incremental cost of the rework

Economics

The study of the allocation and distribution of scare resources among competing wants.

Effective call price

The strike price in an optional redemption provision plus the accrued interest to the
redemption date.

enterprise resource planning (ERP) system

a packaged software program that allows a company to
(1) automate and integrate the majority of its business processes,
(2) share common data and practices across the entire enterprise, and
(3) produce and access information in a realtime environment

Enterprise resource planning system

A computer system used to manage all company
resources in the receipt, completion, and delivery of customer orders.

Equilibrium market price of risk

The slope of the capital market line (CML). Since the CML represents the
return offered to compensate for a perceived level of risk, each point on the line is a balanced market
condition, or equilibrium. The slope of the line determines the additional return needed to compensate for a
unit change in risk.

Escalating Price Option

A nonqualified stock option that uses a sliding scale for
the option price that changes in concert with a peer group index.

Event study

A statistical study that examines how the release of information affects prices at a particular time.

Exercise price

The price at which the underlying future or options contract may be bought or sold.

Exercise price

The price set for buying an asset (call) or selling an asset (put).
The strike price.

Fair market price

Amount at which an asset would change hands between two parties, both having
knowledge of the relevant facts. Also referred to as market price.

Fair price

The equilibrium price for futures contracts. Also called the theoretical futures price, which equals
the spot price continuously compounded at the cost of carry rate for some time interval.

Fair price provision

See:appraisal rights.

Federal Unemployment Tax Act (FUTA)

A federal Act requiring employers to pay a tax on the wages paid to their employees, which is then used to create a
pool of funds to be used for unemployment benefits.

Fiscal policy

The use of government spending and taxing for the specific purpose of stabilizing the economy.

Fiscal Policy

A change in government spending or taxing, designed to influence economic activity.

Fixed price basis

An offering of securities at a fixed price.

Fixed-price tender offer

A one-time offer to purchase a stated number of shares at a stated fixed price,
usually a premium to the current market price.

Flat price (also clean price)

The quoted newspaper price of a bond that does not include accrued interest.
The price paid by purchaser is the full price.

Flat price risk

Taking a position either long or short that does not involve spreading.

Flexible budget

A method of budgetary control that flexes, i.e. adjusts the original budget by applying standard
prices and costs per unit to the actual production volume.

flexible budget

a presentation of multiple budgets that
show costs according to their behavior at different levels
of activity

Flexible Exchange Rate

An exchange rate whose value is determined by the forces of supply and demand on the foreign exchange market.

flexible manufacturing system (FMS)

a production system in which a single factory manufactures numerous variations
of products through the use of computer-controlled
robots
focused factory arrangement
an arrangement in which a
vendor (which may be an external party or an internal corporate
division) agrees to provide a limited number of
products according to specifications or to perform a limited
number of unique services to a company that is typically
operating on a just-in-time system

Flexible Spending Account

A form of cafeteria plan allowing employees to pay
for some medical or dependent care expenses with pretax pay deductions.

Flexible Term

Optional periods of time which the conditions of a contract will be carried out.

Frictional Unemployment

unemployment associated with people changing jobs or quitting to search for new jobs.

Full-Employment Output

The level of output produced by the economy when operating at the natural rate of unemployment.

Full price

Also called dirty price, the price of a bond including accrued interest. Related: flat price.

Futures price

The price at which the parties to a futures contract agree to transact on the settlement date.

Government bond

See: government securities.

Government National Mortgage Association (Ginnie Mae)

A wholly owned U.S. government corporation
within the Department of Housing & Urban Development. Ginnie Mae guarantees the timely payment of
principal and interest on securities issued by approved servicers that are collateralized by FHA-issued, VAguaranteed,
or Farmers Home Administration (FmHA)-guaranteed mortgages.

Government securities

Negotiable U.S. Treasury securities.

Government sponsored enterprises

Privately owned, publicly chartered entities, such as the Student Loan
Marketing Association, created by Congress to reduce the cost of capital for certain borrowing sectors of the
economy including farmers, homeowners, and students.

High price

The highest (intraday) price of a stock over the past 52 weeks, adjusted for any stock splits.

Incomes Policy

A policy designed to lower inflation without reducing aggregate demand. Wage/price controls are an example.

input-output coefficient

a number (prefaced as a multiplier
to an unknown variable) that indicates the rate at which each
decision variable uses up (or depletes) the scarce resource

Input-output tables

Tables that indicate how much each industry requires of the production of each other
industry in order to produce each dollar of its own output.

Insolvency risk

The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk.

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