WOK tells us that LOUDNESS simulates the loudness button on old HiFi amps, which alters the frequency response curve to correspond roughly with the equal loudness characteristic of the ear at lower volumes. Here's what WOK has to say,
"The level of high and low frequencies is increased at low listening levels, to compensate for the fact that as the volume of audio decreases, the ears lower sensitivity to extreme high and low frequencies may cause these signals to fall below threshold. As a result audio material may seem to become 'thin' sounding at low volumes, losing bass and treble, the 'Loudness compensation' button (often just labelled 'Loudness' or 'Loud') is intended to rectify this situation."
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