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.
B
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