Crowding out in the context of aggregate demand refers to a situation where increased government spending leads to a reduction in private sector spending and investment. This can happen because when the government borrows more to finance its spending (by issuing bonds), it can raise interest rates, which makes borrowing more expensive for businesses and consumers. As a result, private sector consumption and investment might decline, thus "crowding out" some of the effects of the government’s fiscal stimulus.
In terms of aggregate demand (AD), the idea is that while government spending might initially increase AD, the negative effect on private spending (due to higher interest rates or other factors) can offset or reduce the overall increase in AD.
