Abstract
This paper examines the price of crude oil and explains how the variations in price affect selected US macroeconomic variable. Since the USA is a net importer of oil, this paper uses a balance of goods and services (BGS) model to show how oil price variation controls the balance of payment (BP) curve through money supply and exchange rates. The result shows that coefficient of money supply is −0.62 indicating that 1% increase in money supply will result in 0.62% reduction in BGS. This causes a leftward shift in BP curve, creating a deficit. The coefficient of price of oil is −0.24, implying that an increase in the price of oil will result in a decrease in the BGS and a left shift in the BP curve. Both effects shift the BP curve to the left. This depreciates the exchange rate (e) and reduces output (y).
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