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Overheating of an economy can occur when
  1. there is high consumption and low savings
  2. its productive capacity is unable to keep pace with growing aggregate demand
Select the correct answer code:
  • a)
    1 only 
  • b)
    2 only 
  • c)
    Both 1 and 2 
  • d)
    Neither 1 nor 2
Correct answer is option 'C'. Can you explain this answer?
Most Upvoted Answer
Overheating of an economy can occur when there is high consumption and...
  • Overheating of an economy occurs when its productive capacity is unable to keep pace with growing aggregate demand leading to inflation. 
  • When there is excess demand and low supply, high consumption and low savings can lead to a situation where there is a shortage of investible capital. The economy is unable to supply demanded goods and prices start increases.
  • This can be caused due to additional liquidity pumped in the system by the central bank or government. When people have more money in the short-term, they can demand more goods and services causing the economy to heat up in the short-term, until the demand is satisfied.
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Overheating of an economy can occur when there is high consumption and low savings its productive capacity is unable to keep pace with growing aggregate demandSelect the correct answer code:a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'C'. Can you explain this answer?
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