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

A) goods and services must cost half as much in Britain as in the U.S.
B) exchange rate should approach $2 per pound.
C) exchange rate should approach $0.50 per pound.
D) goods and services must cost twice as much in Britain as in the U.S.
E) reason for the difference in price is a difference in the cost of transportation in the two countries.

According to the purchasing power parity theory, the exchange rate should adjust in such a way that the same basket of goods would cost the same amount in different countries when the prices are converted into a common currency. In this case, the basket of goods costs $400 in the US and £200 in Britain. Since 1 pound is worth more than 1 dollar, the exchange rate should be higher than 1 to 1. The exchange rate can be calculated as $400/£200 = $2/£1, which means that the exchange rate should approach $2 per pound. Therefore, choice B is the correct answer.