Dalin Chen owns homes in Sydney, Australia, and Denver, United States. She travels between the two cities at least twice a year. Because of her frequent trips, she wants to buy some new high-quality luggage. She has done her research and has decided to purchase a Briggs and Riley three-piece luggage set. There are retail stores in Denver and Sydney. Dalin was a finance major and wants to use purchasing power parity to determine if she is paying the same price regardless of where she makes her purchase.

a. If the price of the three-piece luggage set in Denver is USD850 and the price of the same three-piece set in Sydney is AUD930, using purchasing power parity, is the price of the luggage truly equal if the spot rate is AUD1.0941 = USD1.00?

b. If the price of the luggage remains the same in Denver one year from now, determine the price of the luggage in Sydney in one year’s time if PPP holds true. The U.S. inflation rate is 1.15 %, and the Australian inflation rate is 3.13 %.