AD Shift Left — Keynesian (Recession)

AD falls from AD₁ to AD₂, for example because confidence collapses. The economy moves onto the horizontal section of LRAS, where there is plenty of spare capacity. Real GDP falls sharply from Y₁ to Y₂ but the price level falls only slightly, from P₁ to P₂. Output is now well below full capacity at Y_fe, so there is a large negative output gap and cyclical unemployment rises.