A flight instructor applicant needs to learn to read the regulations, and understand them.
A ground instructor certificate is just that; a ground instructor certificate. It's not pilot certificate, it's not a flight instructor certificate. It's a ground instructor certificate. One does not "upgrade" a ground instructor certificate to a flight instructor certificate. Your wife intends to obtain a new certificate.
14 CFR 61.183(e)(1) authorizes your wife to forgo the Fundamentals of Instructing (FOI), as she already holds a ground instructor certificate.
However, 61.183(f) provides that your wife must still pass a knowledge exam on "aeronautical knowledge areas for a recreational, private, and commercial pilot certificate applicable to the aircraft category for which flight instructor privileges are sought," which translates to the fact that she needs to take the Flight Instructor Airplane knowlege exam.
Looks like you're on crack after all.