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

Question

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

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D

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GMATNinja · Accepted Answer

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 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!

egmat · Answer

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sunnypv · Answer

Could you please discuss each choice in detail?

AT1982 · Answer

In order to AIM -  control a surge in bank lending and to prevent inflation , the central bank of Country X plans to METHOD BEING ADOPTED -  increase interest rates . However, economists warn that higher interest rates will RESULT -  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 PREMISE 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. NO RELATION BANK LENDING. PPL MAY STILL BORROW, WE CAN'T SAY
B) Country X's businesses cannot continue to export goods at the current high rate without significant investment spending. WE CAN'T SAY/ EXTREME WORDS
C) inflationary price increases generally cause consumers to limit their purchases. OUT OF SCOPE.
D) many businesses in Country X have in recent years concentrated their investment spending on imported industrial equipment. REQUIRE MORE LOANS/MONEY........
E) the trade surplus has increased due to new firms borrowing money in order to enter the export business. NOT RELEVANT

Though not a great explanation but may help.....

Sreeko · Answer

Wouldnt answer D also be flawed as businesses may not continue to follow the same behavior just because they have been doing so for the past few years?

YashYashkratos · Answer

seems like a complete the passage question instead of an assumption question-

D) is correct as it says - most companies target investments in imports and that is what the stem wants ( the sensitive trade surplus not to be further disturbed )

GMATNinja · Answer

You're right that choice (D) doesn't GUARANTEE that the same pattern will continue in the future, but that's fine. (D) provides support for the prediction that higher interest rates will widen the country's politically sensitive trade surplus, so it logically completes the argument -- unlike the other four answer choices. So (D) is our winner.

I hope that helps!

SudsMeister · Answer

Why does this question kind of go against the normally accepted logic in economics / business / finance?
Trade surplus increasing = a good thing.
Yet, it is somewhat portrayed as if a rise in trade surplus would be a politically sensitive issue = basically have some negative connotation attached to it.

I used to think that GMAT questions would not necessarily go against what is generally considered 'correct' in the real world. Maybe I am being too pedantic while applying this generalisation.

KarishmaB · Answer

Govt wants to control bank lending and inflation. Plan: Increase interest rates 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 country has a trade surplus.It exports more than it imports. The economists warn that the surplus will worsen i.e. the gap between exports and imports will increase more and that may make the trading partners unhappy) This is because higher interest rates tend to reduce businesses' investment spending, and because ___________ We are looking for a reason that tells us why increased interest rates will worsen the trade surplus. So it should tell us why increased interest rates will either increase exports or reduce imports or both. A) lower interest rates have encouraged businesses in Country X to borrow money from banks in order to invest So higher interest rates will lead to less investment. This is anyway given to us in the argument. It doesn't clarify why exports will go up or imports will go down. B) Country X's businesses cannot continue to export goods at the current high rate without significant investment spending Higher interest rates will lead to less investment and hence it will reduce exports. But we are looking for a reason why exports will rise (or imports will reduce). Not it. C) inflationary price increases generally cause consumers to limit their purchases With high interest rates, inflation may decrease so consumers may buy more in X. So imports may increase or exports may reduce. Doesn't give us a reason why exports may rise or imports may reduce. Not Correct. D) many businesses in Country X have in recent years concentrated their investment spending on imported industrial equipment Correct. This says that those investing are importing. If interest rates increase, investment spending will reduce and these imports will reduce imports. Hence the trade surplus worsens. E) the trade surplus has increased due to new firms borrowing money in order to enter the export business Why trade surplus is high right now is irrelevant. We are questioning why it will worsen. Answer (D) Here is another best completes question: https://youtu.be/02hcfVqIr-g

GMATNinja · Answer

Your question is a fun one,  SudsMeister , and I apologize for taking so long to answer it.

If I answer it as a "normal human" with an economics degree: larger trade surpluses aren't always good, and larger trade deficits aren't always bad.

Think of it this way: a trade surplus means that more goods are leaving the country than coming in -- and maybe that reduces the availability of goods that citizens want to keep for themselves. Similarly, a trade deficit might mean that a country enjoys a wonderful supply of (perhaps relatively cheap) imported goods.

I won't bore you with more econ stuff on a GMAT forum, but if you're interested in this, I'm sure that The Google can provide you with plenty of rabbit holes on this topic.

Ok, now I'll go back to acting like a GMAT tutor: you don't want to let reality get in the way of your Critical Reasoning. If the passage says that it's a politically sensitive topic, then it's a politically sensitive topic. When you're answering GMAT questions, you only care about what's happening in Country X, not what's happening in the real world.

I hope that helps a bit!

samriddhi1234 · Answer

as a  normal human with an Econ degree  - I had the exact question as  SudsMeister , haha.

thanks  GMATNinja  - your answer makes a lot of sense! majority of the questions I've seen on the GMAT don't go against the conventional reality but this one was a good reminder that we can't let reality get in the way.

egmat · Answer

Understanding the Missing Link in Economic Chain Arguments 
This is a classic "logically completes" question that tests your ability to connect economic cause-and-effect relationships. The trap many test-takers fall into is not carefully mapping out the full logical chain.
 Step 1: Map the Given Chain 
The argument provides:

Central bank raises interest rates → Controls lending/prevents inflation
BUT economists warn: Higher rates → Wider trade surplus (politically sensitive)
Partial explanation: Higher rates → Reduced business investment →   → Wider trade surplus

Step 2: Understand Trade Surplus Mechanics 
Trade Surplus = Exports - Imports
For the surplus to  widen , we need either:

Exports to increase, OR
Imports to decrease

The passage tells us "exports continue to increase at a faster rate than imports" - so exports aren't dropping. This means the mechanism must involve imports being affected.
 Step 3: Connect Investment to Trade Balance 
We need to find: How does reduced business investment lead to a wider trade surplus?
Think about what businesses invest in. If businesses have been investing heavily in  imported  equipment, then:
Higher rates → Less investment → Less spending on imported equipment → Imports decrease → Trade surplus widens
This is exactly what answer choice (D) provides...
 Why Other Choices Fail:

(B) suggests exports would decrease - contradicts the economists' warning
(E) explains past conditions, not future effects of higher rates

Key Learning:

The critical insight is recognizing that in economic arguments, you must trace the complete causal chain. Many students stop at 'reduced investment' without asking 'investment in what?'

This reveals a powerful framework for handling all economic chain arguments on the GMAT. Get the  step-by-step solution here  and learn why answer B is the classic trap and how to avoid it consistently.

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

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GMAT Critical Reasoning (CR) Questions

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

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