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This is, in the above context, the first hint of the inconstancy and weakness of faith for which the Qur'an so often blames the children of Israel: and this, together with what follows in verses {138-140} and {148} ff., is the reason why the story of Moses has been included here among the stories of the earlier prophets whose warnings were neglected by their communities.
I.e., "He will judge you by your actions". As is evident from the reference, in verse {137} below, to the "patience in adversity" which the children of Israel subsequently displayed, it would seem that the hope held out to them by Moses helped them, once again, to overcome their moral weakness; but, at the same time, his words "God will behold how you act" imply a distinct warning.
There is a slight note of querulousness in the people's answer. But Moses allays it by his own example and courage, and his vision of the future: which was amply fulfilled in time. See verse 137 below.
The Israelites, despised and enslaved, were to be rescued and made rulers in Palestine. David and Solomon were great kings and played a notable part in history. But the greatness of Israel was conditional: they were to be judged by their deeds. When they fell from grace, other people were given honour and power. And so it came to be the turn of the Muslims, and so on. Allah gives His gifts to those who are righteous and obey His Law.