The answer is (D) Higher price level.
Here's why:
Sharp Increase in Energy Prices: This acts as a supply shock, specifically a negative supply shock. It disrupts production and increases costs for businesses.
Impact on Aggregate Supply: The negative supply shock shifts the aggregate supply curve to the left, meaning producers are willing to sell less at each price level due to higher input costs (energy).
Stabilization Policy to Increase Aggregate Demand: This policy could involve measures like increasing government spending or lowering interest rates. The goal is to counteract the decrease in demand caused by the supply shock.
Short-Run Outcome: In the short run, the increase in aggregate demand might not be enough to fully offset the leftward shift in aggregate supply. This creates a disequilibrium with:
Long-Run Considerations:
In conclusion, while the stabilization policy aims to increase aggregate demand, in the short run, the most likely outcome of a sharp increase in energy prices combined with a demand-boosting policy is a higher price level (D) and potentially a lower level of output.
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