THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 582

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PA R T V I I Monetary Theory
The impact of the perfect storm of adverse shocks highlights that we need to
understand how monetary and other government policies affect the price level and
economic activity. Chapter 21 discusses how theories of the demand for money
have evolved. Chapters 22 and 23 outline the ISLM model, which explains how
interest rates and total output in the economy are determined. In Chapter 24, we
develop a basic tool, aggregate supply and demand analysis, that will enable us to
study the effect of monetary policy on output and prices. Chapter 25 outlines how
monetary policy affects the aggregate economy. In Chapter 26, we expand on
aggregate supply and demand analysis in order to understand the inflation
process. Chapter 27 examines the rational expectations revolution in monetary
theory and what it implies for analyzing the impact of monetary policy on inflation and economic activity.