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

Country X (what a creative name! ) has a plan: it will increase interest rates. The goal of this plan is "to control a surge in bank lending and to prevent inflation."

However, economists give a warning about this plan: "higher interest rates will widen the country's politically sensitive trade surplus." Specifically, the economists think that "its exports [will] continue to increase at a faster rate than its imports."

From this, we know that Country X already has a trade surplus (more exports than imports), and that this is a "politically sensitive" issue. Economists are worried that this surplus will get worse.

Why? We're given part of the reason, which is that "higher interest rates tend to reduce businesses' investment spending." But how does this have anything to do with the trade surplus? That's what we have to find out in the answer choices -- something that, combined with reduced investment spending, supports the idea that the trade surplus will get worse.

Here are the options:


Hmm. The plan is to raise interest rates, not to lower them. And we already know from the passage that "higher interest rates tend to reduce businesses' investment spending." So (A) isn't really giving us anything new -- it's just telling us that lower rates encourage investing, which we could already infer from the passage.

(A) doesn't give us anything to explain why the trade surplus will widen, so eliminate (A).


We know from the argument that businesses will reduce investment spending. (B) tells us that this will DECREASE exports. That would actually make the trade surplus more narrow, rather than wider.

(B) implies the opposite of the thing we're trying to explain, so (B) is out.


The goal of the plan is to prevent inflation. (C) tells us what would happen if there IS inflation, or in other words, what could happen if Country X DOESN'T implement the plan. Consumers would buy less stuff -- stuff that could potentially be imported. This could widen the trade surplus.

We're trying to explain why implementing the plan could cause a wider trade surplus. (C) gives us a reason why NOT implementing the plan could cause a wider trade surplus. This is basically the opposite of what we need in an answer choice.

(C) is out.


We know from the argument that businesses will reduce their investment spending when the plan is implemented. (D) tells us what they would usually spend their investments on: imported stuff.

So, if investment spending is reduced, then businesses won't be spending as much on imports. This would widen the trade surplus.

Keep (D).


The goal of the plan is to "control a surge in bank lending." In other words, if the plan is implemented, lending should go down.

(E) discusses what new firms do with borrowed money: they enter the export business, which makes the trade surplus increase.

So, if lending goes down, then fewer new firms would enter the export business and the trade surplus would become narrower. We're trying to explain why the trade surplus would increase -- so, again, (E) kinda does the opposite of what we're looking for.

(E) is out, and (D) is the correct answer.

I hope that helps!