What effect does a decrease in consumer confidence typically have on aggregate demand?

A decrease in consumer confidence generally leads to a decrease in aggregate demand because when consumers feel less confident about the economy, they tend to reduce their spending. This phenomenon occurs as households may be concerned about job security, future income, and overall economic stability.

When consumers are uncertain or pessimistic, they are more likely to hold off on making significant purchases, such as cars, homes, or luxury items, and instead increase their savings as a precautionary measure. This pullback in consumer spending directly impacts businesses, which may see lower sales and, consequently, may delay investment and hiring.

As consumer expenditure is a major component of aggregate demand, a decline in consumer confidence typically results in reduced overall demand in the economy, leading to potential slowdowns in growth and possibly contributing to recessionary conditions. Therefore, the correct answer highlights the negative relationship between consumer confidence and aggregate demand.