Which of the following best explains why the long- term interest rate will generally change by less than 1% when the short- term interest changes by 1%?
A) The mathematical calculations are more difficult for analysts in the case of long- term bonds.
B) Financial market participants will not expect this increase in the short- term interest rate to persist fully in the future.
C) Long- term rates are always lower than short- term rates, so there is less room for them to change.
D) Financial markets are often swept up by bubbles and fads.
E) Financial markets assume that the central bank will be passive as interest rates rise or fall.

Question

Quizplus · Accepted Answer

Financial market participants will not expect the increase in the short-term interest rate to persist fully in the future. This is because long-term interest rates are affected by a variety of factors, including inflation expectations and overall economic conditions, which may not be fully captured by short-term interest rate movements. Therefore, market participants generally do not expect short-term rate changes to have a one-to-one impact on long-term rates.

Which of the Following Best Explains Why the Long- Term