While Saudi Arabia seeks to diversify its economy, the Saudi economy is dominated by the petroleum sector. In addition, the Saudi Arabian Riyal (SAR) is pegged to the U.S. Dollar. For this week’s discussion, please answer the following questions:
- What are the advantages and disadvantages of the pegged exchange rate?
- Analyze the effect on the economy of Saudi Arabia (GDP, interest rates, inflation, and trade balance) given two scenarios when there is a dramatically declining world oil price or a dramatically increasing world oil price.
Requirements: 4-5
Answer previewIt may also weaken the country’s currency against other currencies, especially if it is dependent on exports. PER limits the flexibility of the country’s exchange rate. For instance, if the Saudi Arabian currency is weak, the government is forced to devalue the currency to boost exports (Lv et al.,2018). In return, this results in higher inflation and reduced economic growth. In addition, PER can create a trade deficit. Hence, this means that the country will tend to import more than export leading to financial problems. Another disadvantage is that the country will require a higher interest rate to stabilize the currency. Therefore, it makes it hard for domestic businesses to borrow money from foreign currencies and export their products. In other words, it can be very expensive for businesses to buy foreign-produced goods.[1491 Words]
