At the bottom of the Sound Levels window, you'll see Use Echo Cancellation checkbox. But what does it mean?

Use Echo Cancellation turns on macOS's built-in voice processor. It's meant to reduce feedback for situations where the sound coming out of the computer's speakers might be getting picked up by the microphone. 

It also applies automatic gain control in order to reduce background noise. 

It works best with the Mac's built-in mic and speaker, but can also be used with an external mic. The option is only available when your Mac's output is set to built-in speakers. If you do need Echo Cancellation when using external speakers, check the Enable Echo Cancellation for External Speakers checkbox in the Audio preferences.

When using Echo Cancellation, only sound from the first channel of audio will be used. All other channels are ignored. So for multi-channel input devices, be sure turn this off.

Additionally, the voice processor will not work well with anything but a voice in a quiet setting. Musical performances or voices in a room with a natural reverberation such a as church will sound "muddy" or "underwater". If you're using a high-end mixer board, or streaming live music, make sure to turn this setting off.