Argentine Tears.The Argentine peso was fixed through a currency board at Ps1.00

1.00/$ throughout the 1990s. In January 2002 the Argentine peso was floated. On January29, 2003 it was trading at Ps3.20

3.20/$. During that one year periodArgentina's inflation rate was 20

20% on an annualized basis. Inflation in the United States during that same period was 2.2

2.2% annualized.

a. What should have been the exchange rate in January 2003 if PPPheld?

b. By what percentage was the Argentine peso undervalued on an annualizedbasis?

c. What were the probable causes ofundervaluation?