Purchasing power parity and the Argentine currency board (A). In April 1991 Argentina established a currency board whereby for all practical purposes the Argentine peso was pegged to the U.S. dollar at parity US$1 = ARS 1 during the entire decade of the 1990s. Ten years later, as result of a deep economic crisis, the peso was unpegged and promptly collapsed to US$1 = ARS 2. 20.

a. During the first year of operating its currency board, Argentina experienced inflation at the rate of 11 percent whereas the U.S. rate of inflation was 3 percent.

What was the real exchange rate US$/ARS at the end of the first year?

b. Was the peso overvalued or undervalued?