In order to control a surge in bank lending and to prevent inflation, the central bank of Country X plans...
GMAT Critical Reasoning : (CR) Questions
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?
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. |
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| 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. |
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| This is because higher interest rates tend to reduce businesses' investment spending, and because |
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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.
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.
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.
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.
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.
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.