Consider a comparison between interest rates in two different periods, 1961 and 1974. In 1960, annual interest rates were around 6% and credit was readily available for families who wanted to buy homes. The inflation rate was 1%. By 1974, the interest rate had reached 9 percent while new home construction came to a halt and mortgage funds dried up in many parts of the country. In 1974 (during that single year) prices rose by about 12%.

1. Is a direct comparison between these two interest rates meaningful or useful? Explain.
2. Take the perspective of lenders, the banks offering mortgage loans, in 1961. For a simple analysis of this perspective, suppose you lend $100,000 for one year at a rate of 6% interest. How much do you have in nominal terms at the end of the year? How much in terms of purchasing power?
3. Next, take the perspective of lenders in 1974. If you lend $100,000 for one year at a rate of 9% interest, how much do you have at the end of the year? How much in terms of purchasing power?
4. During the 1970s policy makers in some states advocated interest rate ceilings to keep interest rates from climbing too high. Connect this and parts b and c to explain the credit market situation (i.e. the availability of funds for mortgage loans) in 1974.