In section 4(a) of chapter 3 it was shown that by using prices (the ratios of exchange between goods and services and money) heterogeneous items can be expressed in terms of a common unit. Money, as the unit of account, greatly simplifies the task of measuring economic activity. But money also plays a positive role in determining economic activity.

In this and the following chapter the link between monetary factors and the process of income-determination is explained. The nature of money, the role of the banking system in the creation of money, and the role of the financial system in arranging the transfer of funds between entities are explained. It is shown that it is not possible to make a simple, direct causal link between changes in the quantity of money and changes in the level of economic activity. However, the demand for and supply of money do influence economic activity through their effect upon aggregate demand. Their influence is exercised in subtle and complex ways, but the main impact is through changes in the cost and availability of finance. Chapter 4 presented the basic argument of this book—that the level of economic activity is determined by the interaction of aggregate demand with aggregate supply. In that chapter the determinants of consumption and investment expenditures were discussed briefly.