Overheated Economy Definition | Overheated market

LinkedInwithBackgroundMacroeconomicsGuidetoEconomicDepressionGuidetoEconomicRecessionEconomicsMacroeconomicsWhatIsanOverheatedEconomy?Anoverheatedeconomyisonethathasexperienced aprolongedperiodofgoodeconomicgrowthandactivitythathasledtohighlevelsofinflation,triggeredbyincreasedconsumerwealth.KeyTakeawaysAnoverheatingeconomyisaneconomythatisexpandingatanunsustainablerate.Thetwomainsignsofanoverheatingeconomyarerisingratesofinflationandanunemploymentratethatisbelowthenormalrateforaneconomy.Causesofanoverheatingeconomyrangefromexternaleconomicshockstoassetbubbles.UnderstandinganOverheatedEconomyAsharpriseinpricescausesinefficientsupplyallocationsasproducersoverproduceandcreateexcessproductioncapacityinanattempttocapitalizeonthehighlevelsofwealth.Unfortunately,theseinefficienciesandinflationwilleventuallyhindertheeconomy'sgrowthandcanoftenbeaprecursorto arecession.Simplyput,anoverheatedeconomyisonethatisexpandingataratethatisunsustainable.Therearetwomainsignsofanoverheatingeconomy—risingratesofinflationandanunemploymentratethatisbelowthenormalrateforaneconomy.RisingRatesofInflationRisinginflationistypicallyoneofthefirstsignsthataneconomyisoverheating.Asaresult,governmentsandcentralbankswillusuallyraiseinterestratesinanattempttolowertheamountofspendingandborrowing.Whilecentralbankscancombatrisinginflationthroughinterestrateincreases,theycanoftencometoolate.Becauseinflationisalaggingindicator,itcantakeawhileforchangesinpolicytoreducetherate. BetweenJune2004andJune2006,theFederalReserveBoard(FRB)increasedtheinterestrate17timesasagradualmeansofslowingAmerica'soverheatedeconomy.However,twoyearslater,U.S.inflationhit5.6percent,acyclehigh.Thisrapidriseinpriceswasfollowedbyacripplingrecession,whichsawinflationplungedbelowzerowithinsixmonths.AbnormallyHighEmploymentRatesThesecondsignofanoverheatingeconomyisanunemploymentratethatisbelowthenormalrateforacountry.Fullemploymentshouldbeagoodthing.Butfullemploymentalsomeanshigherinflationsinceeveryonehasajob(meaningproductivityisatana

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