The Argentine peso was fixed through a currency board at Ps1.00/$ throughout the 1990s. In January 2002 the Argentine peso was floated. On January 29, 2003 it was trading at Ps3.24/$ During that one year period. Argentina's inflation rate was 21% on an annualized basis. Inflation in the United States during that same period was 2.4% annualized.
a. What should have been the exchange rate in January 2003 if PPP held (Round to five decimal places.)
b. By what percentage was the Argentine peso undervalued on an annualized basis (Round to five decimal places.)
c. What were the probable causes of undervaluation?