When everyone stops spending at the same time, why does the damage multiply?
Background
In 2008-2009, aggregate demand collapsed. Household consumption fell as wealth evaporated, investment cratered as credit froze, and net exports provided no cushion. The result was the sharpest contraction in U.S. output since the 1930s. Understanding what caused the collapse -- and what arrested it -- requires a framework that tracks all components of spending simultaneously.
Aggregate demand is that framework. It is not a behavioral description of why people spend -- that comes from the underlying consumption and investment theory -- but a general equilibrium relationship that tells you what total output is consistent with simultaneous clearing in the goods and money markets at a given price level.
What it covers
The AD curve traces out all combinations of the price level and real output at which the goods market and the money market simultaneously clear. It slopes downward not because of substitution across goods (the standard microeconomic reason) but because a lower price level raises real money balances, reduces interest rates, and stimulates spending -- the Keynes effect -- and because it raises the real value of wealth -- the Pigou effect.
The components are consumption (C), investment (I), government spending (G), and net exports (X - M). Each has its own determinants and its own behavioral equation. Shifts in any component shift the AD curve. The IS-LM model gives the full derivation.
Open question
Why does total spending in an economy fluctuate, and what determines how much of that fluctuation translates into output versus prices?