550 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