Final answer:
In times of tight money, long-term rates tend to be higher due to the increased risks and influence of monetary and fiscal policy over an extended timeframe. Hence, the statement is true.
Step-by-step explanation:
The statement "In periods of tight money, long-term rates are typically higher than short-term rates" is True. During these periods, monetary policy may drive up interest rates to curb inflation, which can result in an increase in the federal funds rate.
Consequently, long-term interest rates, which factor in risks over an extended period, will generally be set higher to account for potential changes in the economy, inflation, and other risks over the duration of the loan or investment. This is a reflection of the normal conditions under which longer-term loans tend to come with higher interest rates compared to short-term loans. Interest rates fluctuate with the business cycle, typically increasing during expansions and decreasing during a recession as evidenced in the behavior of certificates of deposit rates over time.
A consensus estimate indicates that an increase in budget deficits by 1% of GDP can lead to an increase of 0.5-1.0% in the long-term interest rate, emphasizing that government fiscal policy can also affect the yields on these long-term investments.