Saudi Arabian Riyal and the U.S. Dollar (110 Points)

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.

Q1- Discuss the advantages and disadvantages of the pegged exchange rate.

Q2- Indicate the main considerations Saudi Arabia faces from a currency perspective (e.g., currency values, interest rates, inflation, and trade issues) that ensue given two scenarios:

• The first scenario is a dramatically declining world oil price.
• The second scenario is a dramatically increasing world oil price.