[SteveCG]

What you observe is absolutely typical of AM radios. I explain it to myself in a rather hand waving way: When there is no carrier present (your signal generator output turned down to zero) then the noise you hear from the loudspeaker is just one part of the IF noise spectrum beating with another part producing an audible difference signal. These noise parts are independent of each other - ie a random spectrum. When you have a carrier present then what you hear is the sum of the parts still beating with each other AND the carrier beating with the parts. The signals are multiplied together - the detecting diode is a non-linear device - so the audible sound gets louder as you increase the carrier level.

I am certain a text book will explain it all in a proper manner - and probably far more accurately than me!