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.
. Another advantage of the pegged exchange rate is that it encourages the government to adopt responsible macroeconomic policies. Pegged exchange rate regime deters governments from adopting macroeconomic policies that appear irresponsible, like currency devaluation. Also, the PER attracts foreign investment in the country.
The stability of the exchange rate may encourage foreign investors to invest in the country. In return, foreign investment has a multiplier effect on economic growth in the country. Lastly, it reduces volatility. It allows local businesses to predict the prices of goods and services in the international market. Being aware of the actual pricing in the international market allows the managers to predict the quantities that will be demanded at that price. In such a case, the businesspeople are shielded from volatility and can insulate themselves from foreign exchange