This is the main area of debate between Keynesian and Monetarist economists. 

Demand Management

Keynesians believe that governments should manage the level of aggregate demand in order to remove inflationary and deflationary gaps as well as smooth out the effects of cyclical fluctuations in national income.

Monetarists feel that governments shouldn’t engage in such policies.  They claim such policies will at best be ineffective and at worst actually be de-stabilising.

Both Conservative and Labour governments pursued a policy of demand management throughout the 1960s and 1970s until stagflation gripped the UK economy.  Thatcher opted for Monetarist supply side policies which set the tone for UK economic policy through the 1980s and 1990s.

Supply Side

Supply side policies aim to shift both the SRAS and LRAS to the right, which will lead to a reduction in the price level and an increase in national income.  This will lead to a reduction in unemployment, shifting the Phillips Curve inwards.  Monetarists state that supply side policies should be used to free up the market and reduce the amount of government intervention, e.g., deregulation, provide incentives and encourage private enterprise.  Keynesians also believe in supply side policies, but of a more interventionalist nature, e.g., training schemes and regional grants.

“Third Way” Supply Side Policies

The election of the labour government has brought about a third way, a mixture of Monetarist and Keynesian supply side policies.