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Definition of 'Overshooting'

Overshooting is a term used in economics to describe the situation when an economy experiences a period of unusually high growth or inflation. This can happen when the government or central bank implements policies that are too expansionary, such as increasing the money supply or lowering interest rates.

Overshooting can have a number of negative consequences, including:

* Higher inflation
* Increased economic volatility
* A decline in the value of the currency
* A loss of confidence in the government or central bank

In order to avoid overshooting, central banks typically try to target a specific rate of inflation. They do this by using a variety of tools, such as interest rates, open market operations, and reserve requirements.

However, it is not always easy to control inflation. Sometimes, unexpected events can cause inflation to rise or fall more than the central bank had anticipated. This can lead to overshooting.

For example, in the early 1980s, the United States experienced a period of high inflation. This was due to a number of factors, including the Federal Reserve's decision to raise interest rates in order to combat inflation. However, the Fed's actions had the unintended consequence of causing a recession.

In order to avoid overshooting, central banks need to be careful not to overreact to changes in the economy. They also need to be able to communicate their policy goals to the public in a clear and transparent way.

Overshooting can be a serious problem, but it can be avoided by careful monetary policy.

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