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In Keynesian economics this is a level of activity leading to excess demand. High output levels relative to capacity, at least in some important sectors, lead to shortages of factor inputs, or unusually high levels of imports. Overheating produces inflationary pressure internally and deterioration in the trade balance externally; by causing devaluation of the currency this gives a further boost to inflation.

Reference: Oxford Press Dictonary of Economics, 5th edt.