Answer:
1. 1.17416 peso/$
2. -63.30%
Explanation:
1. The exchange rate in January if PPP is held
1.00 = exchange rate
20 % = inflation in Argentina
0.22% = us inflation
1.00(1+0.20)/(1+0.022)
= 1.00x1.20/1.022
= 1.17416 pesos/$
B. Percentage by which pesos was devalued
(PPP/actual exchange rate)-1
= 1.17416/3.20 -1
= 0.366925-1
= -0.6330
= -63.30%
C. At 20 % we can see that inflation is really high in Argentina which is probably the reason for the undervaluation. But the truth is inflation alone cannot be held responsible. Severe crisis in Argentinas balance of payment is partly responsible