SECTION II {20 marks): Answer all parts of the question. When you answer using a diagram, explain and label the axes carefully. Answers must be given in the space provided below each question. Please show all working for each part of the question. An economy is described by the following equations: C= 1000+ 0.8(Y- T), Cis consumption, Y is income and Tis taxation lP = 1000, planned investment 6 = 500, government spending T: u + W, t = 0.125 is the marginal tax rate _ = 500, is exogenous taxation X: M = 0, X is exports and M is imports; this is a closed economy Y* = 8000, potential output. (i) Prove that for this economy the short run equilibrium level of output is 7000. Is this economy experiencing a contractionary or expansionary gap? (6 marks) (ii) Illustrate the equilibrium calculated in part (i) on a diagram. Label your diagram carefully