Angela Smith travels between New York City and Paris on a regular basis. She is interested in purchasing a nice designer-made business suit and would like 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 a designer-made business suit in NYC is USD750 and the price of the same suit in Paris is EUR720, using purchasing power parity, is the price of the business suit truly equal if the spot rate is USD1.12/EUR? What is the real exchange rate?

(b) If the price of the business suit remains the same in New York one year from now, determine the price of the suit in Paris in one years time if PPP holds true. The U.S. inflation rate is 1.5% and the inflation rate in France is 3%.