When aggregate economic activity is declining, the economy is said to be in a recession. A recession is characterized by a significant decline in economic output, income, employment, and trade for an extended period of time. It is a phase of the business cycle where the overall economic activity slows down, leading to negative growth.

Causes of Declining Aggregate Economic Activity:
There can be several factors that contribute to declining aggregate economic activity. Some of the key causes include:

1. Reduced consumer spending: During a recession, consumers tend to cut back on their spending due to a lack of confidence in the economy. This reduction in consumer spending leads to a decrease in demand for goods and services, which negatively impacts businesses.

2. Declining investment: Businesses also become cautious during a recession and reduce their investment in new projects and expansion. This decline in investment activity further contributes to the decline in economic activity.

3. Tightening credit conditions: During a recession, banks and financial institutions often tighten their lending standards, making it more difficult for individuals and businesses to access credit. This restricts borrowing and limits spending and investment, further exacerbating the decline in economic activity.

4. Global economic factors: Economic downturns in major trading partners or a global economic crisis can also have a significant impact on an economy. Reduced demand for exports, disruptions in global supply chains, and financial contagion can all contribute to declining aggregate economic activity.

Impact of Declining Aggregate Economic Activity:
The decline in aggregate economic activity has various implications for different sectors of the economy:

1. Unemployment: During a recession, businesses often lay off workers due to declining demand and profitability. This leads to a rise in unemployment rates, causing financial hardships for individuals and families.

2. Decline in income: With fewer job opportunities and reduced business activity, individuals experience a decline in income. This can result in lower consumer spending and further contraction of economic activity.

3. Business failures: Some businesses may struggle to survive during a recession, leading to closures and bankruptcies. This can have a ripple effect on the economy, as it leads to job losses and reduced economic output.

4. Government revenue: The decline in economic activity also impacts government revenue, as tax collections decrease. This can lead to budget deficits and challenges in funding public services and programs.

5. Asset prices: Declining economic activity often leads to a decrease in asset prices, such as real estate and stock markets. This can result in wealth erosion for individuals and businesses.

Government Measures to Address Declining Aggregate Economic Activity:
To counter the negative impact of declining aggregate economic activity, governments often implement various measures. Some common strategies include:

1. Monetary policy: Central banks can lower interest rates and engage in quantitative easing to stimulate borrowing, investment, and consumer spending.

2. Fiscal stimulus: Governments can increase public spending and provide tax incentives to boost economic activity and create jobs.

3. Unemployment benefits: Governments may expand unemployment benefits to support individuals who have lost their jobs during a recession.

4. Infrastructure projects: Governments often initiate infrastructure projects to stimulate economic growth, create jobs, and enhance productivity.