In the late 1970s, the inflation rate was over 10 percent per ...

[sjones]

In the late 1970s, the inflation rate was over 10 percent per year. Many home mortgage lending institutions had mortgages outstanding that had been made in the 1960s at nominal interest rates of around 5 percent per year.
 
  Many of these lending institutions failed. What can explain the high failure rate of lenders in the late 1970s?

Question 2

If the production possibilities frontier between bottled water and water in a jug is a straight line, which of the following statements would be correct?
 
  A) Resources are equally productive at producing either product.
  B) There is no decrease in the production of one good when the production of the other is increased.
  C) There is no tradeoff between the two goods.
  D) A large amount of unemployment must exist.
  E) Producing more of one good gives the economy a free lunch.

[cdmart10]

Answer to Question 1

The real interest rate the lenders were earning was 5 percent per year minus 10 percent per year inflation, making the real interest rate significantly negative, -5 percent per year. With the negative real interest rate, these financial institutions were incurring losses and eventually many were forced into bankruptcy.

Answer to Question 2

A

[sjones]

Excellent

[sarah_brady415]

YES! Correct, THANKS for helping me on my review