The purpose of this chapter and the previous one has been to deepen our understanding of aggregate demand. We now have the tools to analyze the effects of monetary and fiscal policy in the long run and in the short run. In the long run, prices are flexible, and we use the classical analysis of Parts Two and Three of this book. In the short run, prices are sticky, and we use the IS–LM model to examine how changes in policy influence the economy.

The model in this and the previous chapter provides the basic framework for analyzing the economy in the short run, but it is not the whole story. In Chapter 13 we examine how international interactions affect the theory of aggregate demand. In Chapter 14 we examine the theory behind short-run aggregate supply. Subsequent chapters further refine the theory and examine various issues that arise as the theory is applied to formulate macroeconomic policy. The IS–LM model presented in this and the previous chapter provides the starting point for this further analysis.