In order to control a surge in bank lending and to prevent inflation…..

A 4 min read

In order to control a surge in bank lending and to prevent inflation, the central bank of Country X plans to increase interest rates. However, economists warn that higher interest rates will widen the country’s politically sensitive trade surplus, as its exports continue to increase at a faster rate than its imports. This is because higher interest rates tend to reduce businesses’ investment spending, and because

Which of the following, if true, most logically completes the argument?

• A. lower interest rates have encouraged businesses in Country X to borrow money from banks in order to invest
• B. Country X’s businesses cannot continue to export goods at the current high rate without significant investment spending
• C. inflationary price increases generally cause consumers to limit their purchases
• D. many businesses in Country X have in recent years concentrated their investment spending on imported industrial equipment
• E. the trade surplus has increased due to new firms borrowing money in order to enter the export business.

Solution:

Passage Analysis:

Text from Passage	Analysis
In order to control a surge in bank lending and to prevent inflation, the central bank of Country X plans to increase interest rates.	What it says: Central bank wants to raise interest rates to stop too much lending and prevent inflation What it does: Sets up the central bank’s goal and their planned solution What it is: Author’s background information Visualization: Bank lending surge → Higher interest rates → Less lending + No inflation
However, economists warn that higher interest rates will widen the country’s politically sensitive trade surplus, as its exports continue to increase at a faster rate than its imports.	What it says: Economists think higher rates will make the trade surplus bigger because exports will grow faster than imports What it does: Introduces a problem with the central bank’s plan – creates an unwanted side effect What it is: Economists’ warning/prediction Visualization: Higher interest rates → Exports  vs Imports  → Trade surplus grows from  to  (politically bad)
This is because higher interest rates tend to reduce businesses’ investment spending, and because	What it says: Higher rates cut business investment spending, and there’s another reason coming What it does: Starts explaining WHY higher rates lead to bigger trade surplus, but leaves us hanging What it is: Author’s partial explanation Visualization: Higher rates → Business investment drops from  to  → [incomplete chain]

Argument Flow:

We start with the central bank’s plan to fix one problem (too much lending and inflation), then economists point out this creates a different problem (bigger trade surplus), and finally we get the start of an explanation for why this happens, but the argument cuts off mid-sentence.

Main Conclusion:

There is no complete conclusion yet – the argument is incomplete and needs us to finish the explanation of why higher interest rates lead to a wider trade surplus.

Logical Structure:

This is an incomplete cause-and-effect chain. The central bank’s solution (higher rates) creates an unintended consequence (bigger trade surplus). We’re given one reason (less business investment) but the argument stops before giving us the complete logical link that would explain the full connection.

Prethinking:

Question type:

Logically Completes – We need to find the missing piece that explains WHY higher interest rates lead to a wider trade surplus. The argument gives us one reason (reduced business investment) but cuts off mid-sentence with ‘and because’ – so we need the second reason.

Precision of Claims

The key claims are about causation and economic relationships: higher interest rates → reduced business investment + [missing reason] → exports grow faster than imports → wider trade surplus. We need to identify what the missing mechanism is that connects higher interest rates to this trade imbalance.

Strategy

Since this is a ‘logically completes’ question, we need to find what makes the economists’ warning make sense. The argument tells us higher rates reduce business investment spending, but there must be another effect of higher rates that explains why exports would continue growing faster than imports, creating a bigger trade surplus. We should think about other economic effects of higher interest rates that could impact the trade balance.

Answer Choices Explained

A. lower interest rates have encouraged businesses in Country X to borrow money from banks in order to invest

This choice discusses what lower interest rates have done in the past (encouraged borrowing for investment), but we need to explain why HIGHER rates will widen the trade surplus. This tells us about past conditions under low rates, not the mechanism by which higher rates affect trade balance. It doesn’t complete the logical chain we need.

B. Country X’s businesses cannot continue to export goods at the current high rate without significant investment spending

This suggests businesses can’t maintain export levels without investment spending, which would mean higher rates (reducing investment) should DECREASE exports and potentially narrow the trade surplus. This contradicts the economists’ warning that the surplus will widen, so it can’t be the right completion.

C. inflationary price increases generally cause consumers to limit their purchases

While this mentions an effect of inflation (consumers limiting purchases), it doesn’t connect to the mechanism we’re trying to complete. The argument is about how higher interest rates affect trade surplus through reduced business investment, not about consumer behavior during inflation.

D. many businesses in Country X have in recent years concentrated their investment spending on imported industrial equipment

This perfectly completes the logical chain! If businesses have been investing heavily in imported equipment, then higher interest rates → reduced investment spending → less money spent on imported equipment → imports decrease → trade surplus widens (since exports continue while imports drop). This explains exactly why the economists warn the surplus will grow.

E. the trade surplus has increased due to new firms borrowing money in order to enter the export business

This talks about the trade surplus increasing due to new export businesses borrowing money, but this describes past conditions that led to the current surplus. We need to explain the future effect of higher rates, not what caused the current situation. Higher rates would actually discourage new borrowing for export ventures.