If the same basket of goods costs $400 in the United States and 200 pounds in Britain, then according to the purchasing power parity theory,

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According to the purchasing power parity theory, the exchange rate between two currencies should adjust to equalize the price of a basket of goods in both countries. In this case, if the same basket of goods costs $400 in the U.S. and 200 pounds in Britain, then the exchange rate should approach $2/pound, as this would make the price of the basket of goods equivalent in both countries (400/2=200). Choice A is incorrect because goods and services in Britain do not have to cost exactly half as much as in the U.S., but rather the exchange rate should adjust so that they can be purchased at equivalent prices. Choice C is incorrect because a rate of $0.50/pound would make goods in Britain cheaper for U.S. consumers than in the U.S., which would not be consistent with the principle of purchasing power parity. Choice D is incorrect because goods and services do not have to cost twice as much in Britain as in the U.S., but rather the exchange rate should adjust so that they can be purchased at equivalent prices. Choice E is incorrect because knowing the exchange rate is actually integral to applying the purchasing power parity theory.

If the Same Basket of Goods Costs $400 in the United