305 W2 - which would push the country in the direction of a...

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Classical model: Open Economy Summary of Article This article is an announcement of the death of Moammar Gadhafi and the potential political implications brought about by the newly formed government. Libya now faces the momentous task of building a democracy from scratch after 42 years of dictatorship. Economic experts from around the world are predicting a huge comeback in the economy now that the full potential of the country is open to world markets. Oil production is currently well below pre-revolution levels but is predicted to recover and exceed those numbers within 15 months. Application of the Model The recent circumstances in Libya can be analyzed as a small closed economy becoming a small open economy. The sudden availability of new markets for exports (specifically oil) will increase Net Exports (NX) from NX (1) to NX (2). With the increase in Net Exports comes a decrease in the Real Exchange Rate from E(1) to E(2). The increase in savings would also decrease the domestic interest rate
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Unformatted text preview: which would push the country in the direction of a trade deficit. If the world interest rate sits at r(W) and the changes in Net Exports push savings to S(2), than Libya could actually soon face a trade deficit. Evaluation This is a rather good use of the model in that the unique situation that this country finds itself in can be accurately predicted by the open economy model. With Libyas Human Development Index currently higher than Mexicos, their potential for growth under a politically stable government is immense. The one piece that I find troubling is the fact that output (Y) is fixed. In the real world the experts predict that Libya will greatly increase its output with its new relatively liberal government. However the model does accurately predict how the exchange rate and real interest rate will be affected by the increase in Net Exports....
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This note was uploaded on 01/29/2012 for the course ECONOMICS 300 taught by Professor Instructor during the Fall '11 term at Boise State.

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305 W2 - which would push the country in the direction of a...

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