IN RECENT YEARS, the economy has been characterized by simultaneous labor-market slack, accelerating inflation, and a progression of real shocks. In response to these events, nontraditional aggregate control measures have been introduced that seek to affect the supply side of the economy. These policies include controls on wages and prices, general and targeted employment credits and wage subsidies, and tax-based incomes policies. This paper compares the effectiveness of monetary policy and one type of supply-management policy in controlling fluctuations in output and the price level. The supply-side program, which is a variant of the employment tax credit, acts directly on the firm's cost of labor and, thereby, on aggregate supply. Monetary policy, on the other hand, directly affects aggregate demand and only indirectly affects the firm's cost of labor through its impact on the price level. Since these programs have different transmission mechanisms, a principal question of the analysis concerns whether they exhibit differences in their ability to respond to demand versus supply shocks. An additional question addressed by the analysis concerns the interaction between the length of wage contracts and the policy parameters. The framework consists of log-linear representations of aggregate demand and supply functions that are subject to random disturbances. Fluctuations in output occur as a consequence of both the random disturbances and the underlying wage rigidity caused by long-term contracts. The presence of long-term contracts is