Certified Financial Management Specialist Practice Exam

Which of the following best describes short-term interest rates?

1. Rates reflecting long-run inflation expectations

2. Rates that are fixed regardless of economic conditions

3. Rates responsive to current economic conditions

4. Rates that apply exclusively to government bonds

The correct answer is: Rates responsive to current economic conditions

Short-term interest rates are primarily influenced by current economic conditions, making the chosen answer accurate. These rates typically fluctuate in response to changes in monetary policy, inflation expectations, and overall economic activity. A rise in consumer spending or inflation can lead central banks to adjust interest rates, thereby affecting short-term rates. Conversely, during economic downturns, central banks may lower rates to stimulate borrowing and investment. The other options do not accurately depict the nature of short-term interest rates: they do not reflect long-run inflation expectations, as they are more closely tied to immediate economic factors rather than long-term forecasts. Additionally, short-term interest rates are not fixed; they change in response to varying economic conditions. Lastly, while government bonds may feature short-term rates, these rates do not apply exclusively to them since various financial instruments, including corporate bonds and loans, also reflect short-term interest rates.