You expect that the rate of inflation next year in Australia will be 3% and in the United States will be 2%. The spot rate of the Australian dollar is US$0.75 and the one year forward rate is US$0.70.

(a) Using purchasing power parity, calculate the expected change in the exchange rate for the Australian dollar. (3 marks)

(b) Using your answer to (a), calculate the expected spot rate of the Australian dollar in one year. (3 marks)