Summer is a time for fun in the sun, though about this time of year the sun usually gets a bit excessive for most people. Drink fluids and wear plenty of sunscreen! Or alternatively you could stay indoors and read up on your macroeconomic terms. Overheating also happens to be a phenomenon in that happens in the financial world as well as the local pool party.
In macroeconomics, overheating refers to an extended period of growth that, if left unchecked, can lead to high levels of inflation. More specifically, overheating occurs when production capacity cannot keep up with growth in aggregate demand. Increased consumer wealth causes producers to overproduce, often encouraging unsustainable methods such as extending worker hours or using machinery beyond recommended standards. These practices can eventually lead to inefficient supply allocations. Prices become inflated, potentially creating a recession.
Overheating is one reason governments and central banks are careful to watch inflation rates, often increasing interest rates when inflation threatens to get out of hand. This policy usually has the desired effect of lowering spending and borrowing so that growth slows. A historical example of the FED repeatedly hiking interest rates in order to prevent overheating occurred between June 2004 and June 2006, in which the interest rate was increased a total of 17 times. More examples of overheating include the Lawson Boom created by Thatcherite policies in the UK, and multiple instances in Switzerland between 1962 and 1991.
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