Suppose the Same Basket of Goods Costs $200 in the U.S.and

question 52

Multiple Choice

Suppose the same basket of goods costs $200 in the U.S.and 100 pounds in Britain and that the exchange rate is $3 per pound.According to purchasing power parity,if the two countries' price levels do not change,what will happen to exchange rate?

• A) The pound would appreciate until the exchange rate reaches $3 per pound.
• B) The pound would depreciate until the exchange rate reaches $2 per pound.
• C) The pound would depreciate until the exchange rate reaches $0.50 per pound.
• D) The dollar price of a pound would remain at $10.
• E) The pound would appreciate until the exchange rate reaches $4 per pound.