DEFINITION of 'Overheated Economy'

When a prolonged period of good economic growth and activity causes high levels of inflation (from increased consumer wealth) and inefficient supply allocations as producers overproduce and create excess production capacity in an attempt to capitalize on the high levels of wealth. Unfortunately, these inefficiencies and inflation will eventually hinder the economy's growth and cause a recession.

BREAKING DOWN 'Overheated Economy'

Rising rates of inflation are typically one of the first signs that an economy is overheating. As a result, governments and central banks will usually raise interest rates in an attempt to lower the amount of spending and borrowing.

Between June 2004 and June 2006, the Federal Reserve Board increased the interest rate 17 times as a gradual means of slowing America's overheated economy.

RELATED TERMS
  1. Inefficient Portfolio

    An inefficient portfolio is an investment portfolio that delivers ...
  2. The Wealth Effect

    The premise that when the value of stock portfolios rises due ...
  3. Inflation Trade

    A method of investing that seeks to profit from an overall increase ...
  4. Inflation

    The rate at which the general level of prices for goods and services ...
  5. Jobless Recovery

    An economic recovery, following a recession, where the economy ...
  6. Excess Capacity

    A situation in which actual production is less than what is achievable ...
Related Articles
  1. Investing

    Wealth Effect

    The wealth effect is a psychological phenomenon that causes people to spend more as the value of their assets rises. The premise is that when consumers' homes or investment portfolios increase ...
  2. Insights

    The Importance Of Inflation And GDP

    Learn the underlying theories behind these concepts and what they can mean for your portfolio.
  3. Investing

    What's a Centrally Planned Economy?

    A centrally planned economy is one where the government controls the country’s supply and demand of goods and services.
  4. Investing

    What Causes Inflation in the United States

    Inflation is the main catalyst behind U.S monetary policy. But what causes this phenomenon of sustained rising prices? Read on to find out.
  5. Financial Advisor

    Do You Need Wealth Management?

    Wealth management is a service that combines financial and investment advice, accounting and tax services, and legal and estate planning.
  6. Insights

    A Primer On Inflation

    Inflation has a negative connotation, but is it all bad or does it offer some tangible benefits?
  7. Insights

    Inflation's Impact On Stock Returns

    When stocks are divided into growth and value categories, the evidence is clear that value stocks perform better in periods of high inflation, and growth stocks perform better during periods ...
  8. Trading

    Cost-Push Inflation Versus Demand-Pull Inflation

    Do you remember how much less you paid for things ten years ago? That’s inflation at work.
  9. Financial Advisor

    What's the Fed Going to do in 2016?

    Learn about the factors that contribute to increases in the federal funds rate by the Federal Reserve and key economic indicators for 2016.
  10. Insights

    How Interest Rates Affect The U.S. Markets

    Interest rates can have both positive and negative effects on U.S. stocks, bonds and inflation.
RELATED FAQS
  1. How long should an expansionary economic policy be implemented?

    Finding the optimal time period to end expansionary economic policy is an urgent issue; the key is found with capacity utilization. Read Answer >>
  2. How can inflation be good for the economy?

    Find out why some economists and public policy makers believe that inflation is a good, or even necessary, phenomenon to ... Read Answer >>
  3. What is the relationship between inflation and interest rates?

    Inflation and interest rates are linked, and frequently referenced in macroeconomics. Inflation refers to the rate at which ... Read Answer >>
  4. How does the law of supply and demand affect monetary policy in the United States?

    Learn about how the law of supply and demand affects monetary policy in the United States. Changing interest rates leads ... Read Answer >>
  5. Why is the U.S. stock market doing well despite the recent U.S. economic downturn?

    The U.S. economy is one of the largest and most important economies of the world. With the continual growth of its GDP, the ... Read Answer >>
  6. What is the correlation between inflation and interest rate risk?

    Learn about the correlation between inflation and interest rate risk. Central banks raise interest rates when inflation becomes ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center