The relationship of articles and demonstratives is complicated - Czech doesn't have articles, but sometimes we use demonstratives when we want to emphasize that we speak of a specific one. So, "to" sometimes takes on the role of the definite article and sometimes it is a demonstrative ("that") (and sometimes it's "it", but not here). I think Duolingo should accept both, unless the context is clear.
"Město" can be translated as both "city" and "town". We don't make that distinction because we don't have many big cities. :) There's the also the word "velkoměsto" ("big city"), but it really has to be a big one (out of the Czech ones, only Prague would qualify).