What does the economy experience when aggregate demand decreases or shifts to the left?

When aggregate demand decreases or shifts to the left, the economy typically experiences a recessionary gap. This occurs because a decrease in aggregate demand indicates that the total quantity of goods and services demanded at every price level has declined. Consequently, there is a reduction in the overall economic activity, which can lead to lower output and higher unemployment.

In this scenario, firms respond to decreased demand by cutting back on production, which means they may lay off workers or reduce hours, leading to an increase in unemployment. The economy begins to operate below its potential output, resulting in a gap between actual output and what could be achieved at full employment. This gap is referred to as a recessionary gap, reflecting the negative consequences of reduced demand on the labor market and overall economic performance.

Understanding the dynamics of aggregate demand and its impact on the economy is crucial, as these shifts play a significant role in influencing economic cycles and policy responses.