Final answer:
The statement regarding the risks of short-term financing due to rising short-term rates and challenges in debt refinancing is true. Banks, for instance, face financial instability when rates paid to depositors surpass earnings from loans. Similarly, short-term foreign investments can rapidly exit in response to economic uncertainties.
Step-by-step explanation:
The statement "Short-term financing is risky because of the possibility of rising short-term rates and the inability of always being able to refund short-term debt" is true. This risk becomes apparent in scenarios where banks have loaned money at fixed interest rates but then face rising market interest rates. If banks do not match the higher rates offered elsewhere, they risk losing customer deposits.
Conversely, raising rates paid to depositors can result in banks paying more than they are earning on legacy loans, potentially leading to financial instability. Additionally, governments face similar risks with high budget and trade deficits, particularly when foreign investment is in short-term portfolio investments and not in long-term physical capital investments by firms. This can lead to a sudden outflow of capital if investors fear a decline in the exchange rate or government default.