The paper develops an alternative to the standard IS-LM framework. There are two asset markets and three prices—the prices of real assets, financial assets, and output. Costs of adjustment and information prevent output prices and output from adjusting instantaneously. Both the size of deficits and the method of financing affect output and prices. Some principal implications are derived. Several of these are also demonstrated, using a graph to show the interaction of asset markets, output markets, and the financing of the budget deficit. Some main implications of standard analysis are rejected. The basis for several "monetarist" conclusions is shown.

Friedman's many contributions to monetary theory did much to renew interest in monetary theory and policy. Heretofore, there has been no statement of the underlying theory that guides his work and generates policy implications. Two recent papers attempt to fill the gap. We have four main criticisms of Friedman's theory. We regard as most important that the theories do not generate principal monetarist conclusions about the role of money and the variability of monetary policy. Friedman's static frameworks leave the relative potency of fiscal and monetary policies dependent on the slopes of the IS and LM curve. This is unsatisfactory.