Imagine a scenario where there is a decline in aggregate demand.  Identify which part of the business cycle is part of a decline in aggregate demand.

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pohnpei397 eNotes educator| Certified Educator

If there is a decline in aggregate demand, the economy is likely to be in a recession.  A decrease in aggregate demand is most likely to lead to a decrease in real GDP.

Real GDP is determined (when looking at a graph) by the intersection of the aggregate demand curve (which slopes downward from left to right) and the aggregate supply curve (which generally slopes upward from right to left).  When the aggregate demand drops, the curve moves back to the left.  This leads to a reduction in the price level and a reduction in GDP.  In real terms, that means that prices will drop and unemployment will rise.

This makes sense when we think about it.  If people buy fewer things (a decline in aggregate demand), the prices will drop because there is less competition for the goods and services that exist.  If people buy fewer things, there will be less need for people to make those things and unemployment will rise.  A time when people are buying less and unemployment is rising is generally a recession.