What typically happens during a recession regarding aggregate demand and supply?

• A. Aggregate demand usually increases
• B. Aggregate supply usually becomes stable
• C. Aggregate demand often decreases, leading to economic contraction
• D. Aggregate supply increases to compensate

Answer: (C)

During a recession, aggregate demand typically decreases, which is a central characteristic of this economic phase. When consumers and businesses experience uncertainty about the future, they tend to reduce spending. This reduction in consumption and investment leads to a decline in overall demand for goods and services within the economy.

Consequently, as demand drops, businesses may cut back on production, which can result in layoffs and further exacerbate the downturn as job losses lead to even lower consumer spending. This creates a cycle of economic contraction, where the initial decrease in aggregate demand triggers a chain reaction impacting employment, investment, and overall economic activity.

The other options describe scenarios that are generally not associated with a recession. For instance, an increase in aggregate supply would generally indicate that producers are confident and are able to ramp up production, which is contrary to what happens during a recession. Similarly, the idea of aggregate demand increasing does not align with the behavioral trends observed during economic downturns, nor is there a typical stabilization of aggregate supply when demand is weak.