In a recession, which effect is most likely on aggregate demand?

In a recession, aggregate demand is most likely to decrease due to several interconnected factors. During a recession, consumer confidence typically drops, leading households and businesses to cut back on spending. With consumers feeling uncertain about their financial future, they are less likely to make significant purchases like homes or cars, and businesses may delay investment due to worries about lower demand for their products and services.

Moreover, higher unemployment rates can further contribute to a decrease in aggregate demand, as fewer employed individuals mean less overall income in the economy, which subsequently leads to reduced consumer spending. Additionally, financial institutions may tighten lending standards, making it more difficult for consumers and businesses to obtain loans, thus further restraining spending and investment.

This culmination of factors results in a notable decline in the overall demand for goods and services in the economy, which aligns with the response indicating a decrease in aggregate demand during a recession.