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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,
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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 Ps3.65/$. During that one-year period Argentina's inflation rate was 20% on an annualized basis.
Inflation in the United States during that same period was 2.5% annualized.
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What should have been the exchange rate in January 2003 if PPP held?
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By what percentage was the Argentine peso undervalued on an annualized basis?
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What were the probable causes of undervaluation?
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