8 The economy has an inflationary gap and the government wants to decrease aggregate demand, cut exports and decrease investment. It has three policy options: decrease government expenditures on goods and services, increase taxes and decrease the supply of money. a Explain the mechanisms at work under each alternative policy. b What is the effect of each policy on the composition of aggregate demand? c What are the short-run effects of each policy on real GDP and the price level? d Which policy would you recommend and why?