Exercise 11.7 In the two years before 2008 the Canadian federal government reduced the GST from 7 percent to 5 percent. Use an ADA/AST/Yp diagram to illustrate and explain the effects of this tax...

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Extracted text: Exercise 11.7 In the two years before 2008 the Canadian federal government reduced the GST from 7 percent to 5 percent. Use an ADA/AST/Yp diagram to illustrate and explain the effects of this tax change on equilibrium output and inflation. If the economy was in equilibrium at Yp and the target inflation rate r* before the tax cut, what monetary policy action, if any, would the central bank make to maintain those equilibrium conditions after the tax cut? What short-run net benefit, if any, would households and businesses realize as a result of the cut in the GST?