3. Purchasing power parity and the Argentine currency board (B-intermediate).

Assume over the 10-year period 1991–2001 the U.S. economy experienced an annualized inflation rate of 1.5 percent. While the currency board was in place, Argentina experienced annual rates of inflation of 172% in 1991, 24.6% in 1992, 10.7% in 1993, 4.3% in 1994, 3.3% in 1995, 0.2% in 1996, 0.5% in 1997, 0.9% in 1998, –1.2% in 1999, 0.9% in 2000, and 0.7% in 2001.

a. What was the annualized inflation rate in Argentina over that same period (use annual compounding)?

b. What was the real/PPP exchange rate at the very end of the 10-year currency board before the peso was allowed to float? Was the peso then undervalued or overvalued?