Overheated Economy

An economy whose economic fundamentals are growing too fast is said to be overheating. Firms and factories in an overheating economy have attained full employment and are operating at the limit of their ability to meet aggregate demand. Overheating economies typically drive price and wage inflation and can lead to rising levels of consumer debt and house prices as consumers ride the transitory feelgood factor. Central banks may opt to cool overheating by raising interest rates, or introducing curbs on excessive lending. Governments can act through fiscal policy actions, raising taxes or reducing government spending. See Output Gap.