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The  term  business  cycle  also   known  as  economic  cycle  stands  for  fluctuations  in  production  as  well  as  economic  activity  and  is  characterized  by  recession,  fiscal  recovery,  growth,  as  well  as  fiscal  decline (Sheffrin 10).

There  are  a  number  of  theories  which  explain  business  cycles.  These  include  but  not  limited  to:  real  business  cycle  theory,  Keynesian  business  cycle  theory,  and  Australian  business  cycle  theory (Sheffrin 12).  Real  business  cycle  theory  argues  that  business  cycles  are  driven  absolutely  by  shocks  in  technology  as  opposed  to  monetary  shocks  or  expectation  changes.  These  technological  shocks  include:  inventions,  bad  weather,  increase  in  the prices  of  imported  oil  and  stricter  safety  as  well  as   environmental  regulations.  These  changes  in turn  affect  the  effectiveness  of  capital  and/or  labor  hence  affect  the  decisions  of  workers  as  well  as  firms  thereby  influencing  their  production  and  buying  habits.  The end result is an effect on output (Sheffrin 13).  The  Austrian  business  cycle  theory  on  the  other  hand  argues  that  business  cycles  are  caused  by  surplus  creation  of  bank  credit  normally  motivated  by  central  banks  through highly  reduced  interest  rates.  This in turn  causes  an  explosion  in  money  supply  leading  to  misallocation  of  resources  as  a  result  of  falsified  interest  rate  signals.  As  market  forces  correct  this  anomaly,  the  mal-investments  are  liquidated  and  this  eventually  leads  to  a  contraction  in  money  supply (Sheffrin 14).  Lastly, Keynesian theory argues that   private sector decisions   occasionally result to ineffective macroeconomic outcomes.  The  theory  therefore    suggests   an  intervention  by  the  public  sector  either  by  monetary  policy  actions  by  the  central  bank  or  fiscal  policy  actions  by  the  government  in order  to   steady  output  over  the  business  cycle (Sheffrin 15).

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The  business  cycle  is  characterized  by  four  distinct  Phases  throughout   its  long  term  growth  trend. These are:  contraction, trough, expansion and peak (Morgan 20).  Expansion is characterized by record sales and profits by businesses.  Businesses  therefore  expand  facilities  in  an  effort   to  prepare  for  continued  sales  growth.  Banks  at  this  stage  are  very willing  to lend  as  they  predict  increased  cash  flows  but  at  an  higher  interest  rate  as  a  result  of  loans  high  demand.  As  a  result  of  high  profits  and  sales,  companies  pay  high  wages.  Continued  rise  in  prices,  wages  and  interest  rates  ultimately  lead  to  a  stop  in  the  expansion  of  product  demand  as  well  as  new  hiring  and  lending  and  at  this  point,  the  economy  is  said  to  be  at  peak (Morgan 21).  Peak is the upper   turning point of the business cycle.  At  peak  point,  sales  no  longer  expand  and  the  economy  starts  slowing  down  which  eventually  result  to  a  contraction.  Contraction  is  marked  by  a slowdown  in  the  pace  of  economic  activity.  Trough  on  the  other  hand  is  just  the  lower  turning  point of  a  business  cycle.  Its here where a contraction turns into an expansion (Morgan 22).  

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Forecasting  is  done  with  the  aim  of  providing  an  aid  to  decision  making  as well  as  planning for  the  future.  Forecasting  methods  include  but  not limited  to  Inventory  control/  production  planning,  which  involves  forecasting  product  demand  in  order to enable  us  plan  on  how  to control  raw  materials  as well  as  finished  goods  stock  and  also  plan  production  schedule (Morgan 24).  Investment    policy  as  a  method   involves   predicting  financial  information  like  exchange  rates,  prices  of  shares  and  interest  rates.  Lastly,  Economic  policy  as a  forecasting  method  involves  the  prediction  of  economic  information  such  as  unemployment,  economic  growth  and  inflation  rate  in  order  to  enable  the  government  and  businesses  to  plan  for  the  future (Morgan 25). 

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Currently, the U.S.  Economy is in the trough phase of business cycle.  This  as  mentioned  is  a  phase  that  marks  a  turn  from  contraction  to  expansion.  The  economy  experienced a  contraction  from  mid-  2008  till  the  third  quarter  of  2009 (Jeanne 13).  This  was  occasioned  by  the  global  economic  downturn,  the  sub - prime  mortgage  crisis,  investment  bank failures,  failing  home  prices  and  tight  credit.  Reports  indicate  that,  since   September  2010,  there has  been    a  pleasing  gain  in  jobs  as  compared  to  the  previous  year.  About  130.2  million  jobs  were  recorded  and  this  marked  an  increase  by  about  344,000  from  the  year  before.  The  same  period  has  also witnessed  a  decrease    in  rents  for  commercial  real  estate.  All  these  attest to  the  fact  that  the  economy  is  moving  gradually  from  contraction  to  expansion  hence  in  the  trough  phase (Jeanne 13).   

Inflation  refers  to   an  increase   in  credit  as  well as  the  amount  of  money  in  an  economy  as  compared  to  the  goods  and  services  in  supply.  Inflation  normally  results  to  rise  in  prices  of  goods  and  services (Sheffrin 5).   Companies  are  therefore  forced  to  pay  their  employees  higher  salaries  which  commensurate  with  the  cost  of  living.  For  these  companies  to  afford  the  high  salaries,  they  are  forced  to  reduce  the  number  of  employees  and  retain  the  number  they  can  comfortably  sustain.  This shows that inflation leads to loss of employment (Sheffrin 6). 

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Two economic stimulus packages have been witnessed in the U.S.  Since the economic recession began.  The  first  one  was  given  by  president  Bush  which  was  about  $700billion.  President  Obama  gave  $787  billion  in  his  ambitious  plan  to  create  3million  to  4  million  jobs (Jeanne 14).  These  stimulus  packages  were  given  following   the  global  economic  downturn,  the  sub - prime  mortgage  crisis,  investment  bank failures,  failing  home  prices  and  tight  credit.  Obama's  package  involved  $288  billion  in  tax  cuts,  $224  billion  in  extended  unemployment  benefits,  education  and  health  care,  and  $275  billion  for  job  creation  which  would  make  use  of  federal  contracts,  grants  and  loans.   The  stimulus  package  worked  as  about  130.2  million  jobs  had  been    created  by  September  2010  which  marked  an  increase  by  about  344,000  from  the  year  before (Jeanne 15).

In  conclusion,  this  paper  has  discussed  a  number  of  theories  which  explain  business  cycles  which  have  included  real  business  cycle  theory,  Keynesian  business  cycle  theory,  and  Australian  business  cycle  theory.  Four  business  phases  which  characterize  a  business  cycle  have  been  discussed  which  include  expansion,  peak,  trough  and  contraction. Forecasting  on  the  other  hand  has  been  seen  to  involve   methods  such as  Inventory  control/  production  planning , Investment    policy  and   Economic  policy.   Inflation,  an  increase   in  credit  as  well as  the  amount  of  money  in  an  economy  as  compared  to  the  goods  and  services  in  supply  has  been  noted  to  lead  to  increase  in  unemployment.

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