I am a fan of both the Dodge/Ram trucks and Jeep vehicles, biggman100. I've lived and breathed "Jeep" since 1964 and written three books on Jeep models that earned Mopar part numbers, so I better be able to answer your reasonable questions!
To begin, the double letter designation is a tradition with Jeep and can be traced to the Model MB WWII Willys and GPW 4x4s. These were followed in 1945 by the postwar Willys "CJ" models, beginning with the rare and earliest CJ-2 and popularized with the CJ-2A. This postwar model strongly resembled and shared components with the MB military models, they rolled down parallel assembly lines for the last few months of the war.
The CJ letters had some significance, as they stood for "Civilian Jeep". This quickly disintegrated into letters like "VJ" for the late-'forties 2WD Jeepster. Aside from post-WWII military models, which were the M38 or MC (similar to the CJ-3A) and M38A1 or MD (prototype for the original CJ-5 and CJ-6), the postwar Jeep vehicles stayed with the double-letter designation, which carried from the Willys-Overland era through the Kaiser/Jeep Corporation era, through the AMC/Jeep Corporation era and into the Chrysler/Jeep Corporation era.
Rather than rehash the list from my head, there is a detailed account of Jeep history and model lineage at this Wikipedia article: http://en.wikipedia.org/wiki/Jeep. Check it out, you'll get both the model breakout and the letter designations in the process.
For the Cliffs Notes version and forum discussions, the CJs are postwar utility 4x4 models built from 1945-86; the YJ Wrangler followed the CJ with a more modern body and some handling features, though still leaf springs, in its 1987-95 form; the TJ Wrangler was the first link-and-coil suspension Jeep utility 4x4 built from 1997-2006, including editions like the Sahara and upgrade chassis Rubicon; the XJ Cherokee is the compact, unit body SUV introduced in 1984 that ran through 2001; the Grand Cherokee is upscale and "bigger" than the XJ, and the Grand Cherokee began with the 1992-98 ZJ, then the 1999-2004 WJ, and so forth.
As you guessed, the letters are the model, not the engine options, trim level or accessory package. Within each model is a trim "package", an approach popularized as far back as the Kaiser era with the J-truck Wagoneer versus Super Wagoneer, the CJ Tuxedo Park, the Renegade, and so forth.
There is also the J-truck based, full size Cherokee, very popular in the 'seventies and 'eighties, now an iconic build-up vehicle today, especially the more common 2-door version. This vehicle should not be confused with the XJ Cherokee. Likewise, the original J-truck (Gladiator ladder frame chassis) Wagoneer, the Super Wagoneer and Grand Wagoneer should not be confused with either the unit body Grand Cherokee nor the XJ Cherokee/Wagoneer model. The XJ Wagoneer quickly lost favor due to the contrast between its compact unit body and the classic full-size Wagoneer. Jeep quickly dropped that nomenclature on the XJ, reverting to strictly the "Cherokee" with various trim levels.
Note: Today, a full-size chassis J-model (the Kaiser or AMC Jeep J-truck pickup or rare, Gladiator-era panel truck, a full-size Wagoneer, Grand Wagoneer or full-size Cherokee) is commonly called an "FSJ" (Full Size Jeep). This is slang and not a factory designation.
I am happy to add more, but this answers your direct questions, biggman100. Within each model designation, there are sometimes significant differences within the components, enough so that for the CJ models, I broke my Jeep CJ Rebuilder's Manuals (Bentley Publishers) into 1946-71 and 1972-86 editions. However, the overall vehicle "letter" groups are significant and do define the vehicle type, chassis, styling, overall design and intended use.