"The classical neutrality proposition implies that the level of real output will be independent of the quantity of money in the economy. We consider what determines real output. A key component of the classical model is the short-run production function. In general terms at the micro level a production function expresses the maximum amount of output that a firm can produce from any given amounts of factor inputs.” (Snowdon 2005 p. 39)

  1. The relationship between additional labor and additional output is positive.

  1. This relationship exhibits diminishing returns to scale
  2. Additional amounts of capital investment will increase the function of output relative to labor. (Snowdon 2005 p. 39)

“Classical full employment equilibrium is perfectly compatible with the existence of frictional and voluntary unemployment, but does not admit the possibility of involuntary unemployment. Friedman (1968) later introduced the concept of the natural of unemployment when discussing equilibrium unemployment in the labor market.” (Snowdon 2005 p. 44)


  1. Snowdon, Brian and Howard R. Vane. 2005: Edward Elgar Publishing;Modern Macroeconomics: Its Origins, Development And Current State
  2. Friedman, Milton. (1968) “The Role of Monetary Policy” American Economic Review, March.

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