The goods and services tax (GST) was introduced in Australia on
1 July 2000. The preceding months before the GST became active saw
a spike in consumption as consumers rushed to purchase goods that
they perceived would be substantially more expensive with the GST.
The effects of the surging demand on inflation and the central
bank’s policy responses (i.e., cash rate, the policy interest rate
in Australia) are illustrated in Figure 1. Using the AD-AS
framework, explain what happened to output and the price level when
Australia introduced GST in the short run and in the long run. For
simplicity, you may assume that the introduction of GST had no
effects on the supply side of the economy. [6 marks]
The goods and services tax (GST) was introduced in Australia on 1 July 2000. The preceding months before the GST became
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