How can a recession impact aggregate demand?

A recession significantly impacts aggregate demand by diminishing spending and investment, which is reflected in the correct choice. During a recession, consumers tend to lose confidence and may experience job insecurity, leading to reduced consumer spending. Households often prioritize saving over spending, which directly decreases consumption—a key component of aggregate demand.

Businesses also react to economic downturns by cutting back on investment due to lower sales expectations and uncertainty about future economic conditions. This reduction in both consumer spending and business investment results in a notable decline in aggregate demand.

In contrast, the other options present scenarios that are not typically associated with a recession. Increased consumer and business confidence usually occurs during economic growth, not during a downturn. As for having no effect on aggregate demand, this contradicts fundamental economic principles, as recessions are known for causing significant changes in overall economic activity. Lastly, the idea that a recession enhances corporate profits through lower expenditure is misleading, as reduced demand generally leads to lower revenues for businesses, rather than increased profits.