What occurs when aggregate demand is lower than the potential GDP in an economy?

When aggregate demand is lower than the potential GDP, it means that people and businesses are not spending enough money in the economy to reach its full production capacity. This situation can lead to a recessionary gap, where the actual output of goods and services is less than what the economy could produce if it were operating at full strength. For example, if a country can produce 100 million toys a year but only sells 80 million, the gap represents lost jobs and income for workers in that industry. As a result, businesses may cut back on production and lay off employees, leading to higher unemployment and reduced consumer spending. Overall, this imbalance can slow economic growth and create challenges for recovery.