Option A:

- Extensive selling of foreign currency

- Purchasing power parity

- Foreign investment flow

- Arbitrage

Option B and C:

- overvalued

- undervalued

6. Purchasing power parity implies that a unit of any given currency should be able to buy the same quantity of goods in all countries. Suppose that the exchange rate between the United Kingdom and the United States is $1 per 1. Suppose also that people discover that Pretty Girl lipstick is sold for $5.00 in New York and for 7.00 in London. Which of the following is true? There will be an increase in foreign investment flow to the U.K. The purchasing power parity theory does not hold. There will be an increase in the demand for Pretty Girl lipstick in London and an increase the supply of Pretty Girl lipstick in New York. There will be an increase in the demand for Pretty Girl lipstick in New York and an increase the supply of Pretty Girl lipstick in London. If the price difference described above reflects a difference in the price levels of the two countries, the U.S. dollar is , whereas the U.K pound is . Given this difference in the price levels of the two countries, the purchasing power parity exchange rate between the dollar and pound would be per dollar