Overheated Economy

AAA

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.

INVESTOPEDIA EXPLAINS '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. Business Cycle

    The fluctuations in economic activity that an economy experiences ...
  2. Pundit

    A person that publicly expresses their opinions or comments on ...
  3. Economics

    A social science that studies how individuals, governments, firms ...
  4. Inflation

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

    The large set of inter-related economic production and consumption ...
  6. Federal Reserve Board - FRB

    The governing body of the Federal Reserve System. The seven members ...
Related Articles
  1. Investing

    The Ups And Downs Of Investing In Cyclical Stocks

    This strategy can be profitable but only if you know when to dump these stocks.
  2. Investing Basics

    Logic: The Antidote To Emotional Investing

    Playing follow-the-leader in investing can quickly become a dangerous game. Learn how to invest independently and still come out on top.
  3. Active Trading Fundamentals

    Recession: What Does It Mean To Investors?

    Understanding the business cycle and your own investment style can help you cope with an economic decline.
  4. Mutual Funds & ETFs

    GLD vs. IAU: Which Gold ETF is Better?

    Looking to play gold with ETFs? A look at SPDR Gold Trust Shares (GLD) versus iShs Gold Trust Trust Units (IAU).
  5. Economics

    What is the Income Effect?

    In economics, the income effect is the change in the consumption of goods caused by a change in income, whether income goes up or down.
  6. Economics

    What is Fiat Money?

    Fiat money is currency that a government has declared to be legal tender, but is not backed by a physical commodity.
  7. Economics

    What Do You Need To Know About Inflation?

    When it comes to inflation, there is no shortage of opinions: one side argues the Fed should raise rates, and the opposition says the Fed should stay put.
  8. Economics

    What’s Missing For A Turnaround In Brazil?

    Today, many investors have written off Brazil following several years of poor performance, decelerating growth and chronically high inflation.
  9. Economics

    Currency Crises In These Countries Will Shape 2015

    Ongoing financial and geopolitical issues have led several countries to the verge of a currency crisis in 2015.
  10. Forex

    Is Quantitative Easing Destroying The Euro?

    Quantitative easing being undertaken by the ECB to stabilize the Eurozone economies is sure to have some impact in decreasing the value of the euro.

You May Also Like

Hot Definitions
  1. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  2. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  3. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  4. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  5. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  6. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
Trading Center