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09 Feb 2026, 11:37
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Economist: In response to prolonged inflationary pressure, several central banks have raised interest rates to their highest levels in over a decade. The intended effect is to curb inflation by reducing consumer demand. However, in Country X, core inflation has remained stubbornly high despite multiple rate hikes over the past year. Some policymakers now argue that raising rates further will have no effect. But that conclusion may be premature. Unlike in prior tightening cycles, consumers in Country X have unusually high cash reserves due to recent fiscal stimulus programs. Once those excess savings are depleted, current interest rates may begin to exert a stronger downward influence on inflation.
Which of the following, if true, most strengthens the economist’s argument?
A. In previous decades, interest rate hikes took up to 18 months to fully impact inflation, particularly in economies where household savings were low.
B. Inflation in Country X has recently shown signs of moderating in sectors unrelated to consumer demand, such as energy and commodities.
C. Surveys indicate that many consumers in Country X do not fully understand how interest rate changes affect their day-to-day expenses.
D. Businesses in Country X have begun raising prices primarily in response to wage pressures rather than increased demand.
E. Central banks in countries without recent stimulus programs have also struggled to bring down inflation through interest rate increases.
Which of the following, if true, most strengthens the economist’s argument?
A. In previous decades, interest rate hikes took up to 18 months to fully impact inflation, particularly in economies where household savings were low.
B. Inflation in Country X has recently shown signs of moderating in sectors unrelated to consumer demand, such as energy and commodities.
C. Surveys indicate that many consumers in Country X do not fully understand how interest rate changes affect their day-to-day expenses.
D. Businesses in Country X have begun raising prices primarily in response to wage pressures rather than increased demand.
E. Central banks in countries without recent stimulus programs have also struggled to bring down inflation through interest rate increases.
09 Feb 2026, 11:37
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Official Solution:
Economist: In response to prolonged inflationary pressure, several central banks have raised interest rates to their highest levels in over a decade. The intended effect is to curb inflation by reducing consumer demand. However, in Country X, core inflation has remained stubbornly high despite multiple rate hikes over the past year. Some policymakers now argue that raising rates further will have no effect. But that conclusion may be premature. Unlike in prior tightening cycles, consumers in Country X have unusually high cash reserves due to recent fiscal stimulus programs. Once those excess savings are depleted, current interest rates may begin to exert a stronger downward influence on inflation.
Which of the following, if true, most strengthens the economist’s argument?
A. In previous decades, interest rate hikes took up to 18 months to fully impact inflation, particularly in economies where household savings were low.
B. Inflation in Country X has recently shown signs of moderating in sectors unrelated to consumer demand, such as energy and commodities.
C. Surveys indicate that many consumers in Country X do not fully understand how interest rate changes affect their day-to-day expenses.
D. Businesses in Country X have begun raising prices primarily in response to wage pressures rather than increased demand.
E. Central banks in countries without recent stimulus programs have also struggled to bring down inflation through interest rate increases.
A. In previous decades, interest rate hikes took up to 18 months to fully impact inflation, particularly in economies where household savings were low.
This supports the economist’s point. It shows that even in the past, rate hikes took a long time to work and it worked faster when savings were low. That fits perfectly with the idea that high savings are delaying the impact right now, and once those savings go down, inflation might respond more. Let's hold this for now.
B. Inflation in Country X has recently shown signs of moderating in sectors unrelated to consumer demand, such as energy and commodities.
This is irrelevant to the economist’s point. He’s talking about core inflation (which usually excludes volatile things like energy) and how consumer demand might eventually drop once savings run out. This option talks about unrelated sectors like energy or commodities, so it doesn’t strengthen the argument about savings and interest rates.
C. Surveys indicate that many consumers in Country X do not fully understand how interest rate changes affect their day-to-day expenses.
Interesting info, but not useful here. Even if people don’t understand interest rates, what matters is whether their behavior (spending or saving) actually changes when rates go up. The economist isn’t arguing about awareness but he’s talking about excess savings delaying the impact. So this doesn’t help the case.
D. Businesses in Country X have begun raising prices primarily in response to wage pressures rather than increased demand.
This actually weakens the economist’s argument a bit. Why? Because it suggests inflation is not being driven by consumer demand, which is the part rate hikes target. If businesses are hiking prices due to wages, not spending, then rate hikes might genuinely be less effective. That would support the opposite of what the economist is claiming.
E. Central banks in countries without recent stimulus programs have also struggled to bring down inflation through interest rate increases.
Sounds useful, but it weakens the economist’s specific reasoning. The economist is saying stimulus cash is what’s making the difference in Country X. But this option says even countries without stimulus are struggling. That suggests maybe the problem isn’t savings, which goes against the economist’s claim.
After reviewing all of the answer choices, it appears A) is the best answer option even though perhaps not the most satisfying but with others clearly wrong, A is our answer.
Answer: A
Economist: In response to prolonged inflationary pressure, several central banks have raised interest rates to their highest levels in over a decade. The intended effect is to curb inflation by reducing consumer demand. However, in Country X, core inflation has remained stubbornly high despite multiple rate hikes over the past year. Some policymakers now argue that raising rates further will have no effect. But that conclusion may be premature. Unlike in prior tightening cycles, consumers in Country X have unusually high cash reserves due to recent fiscal stimulus programs. Once those excess savings are depleted, current interest rates may begin to exert a stronger downward influence on inflation.
Which of the following, if true, most strengthens the economist’s argument?
A. In previous decades, interest rate hikes took up to 18 months to fully impact inflation, particularly in economies where household savings were low.
B. Inflation in Country X has recently shown signs of moderating in sectors unrelated to consumer demand, such as energy and commodities.
C. Surveys indicate that many consumers in Country X do not fully understand how interest rate changes affect their day-to-day expenses.
D. Businesses in Country X have begun raising prices primarily in response to wage pressures rather than increased demand.
E. Central banks in countries without recent stimulus programs have also struggled to bring down inflation through interest rate increases.
A. In previous decades, interest rate hikes took up to 18 months to fully impact inflation, particularly in economies where household savings were low.
This supports the economist’s point. It shows that even in the past, rate hikes took a long time to work and it worked faster when savings were low. That fits perfectly with the idea that high savings are delaying the impact right now, and once those savings go down, inflation might respond more. Let's hold this for now.
B. Inflation in Country X has recently shown signs of moderating in sectors unrelated to consumer demand, such as energy and commodities.
This is irrelevant to the economist’s point. He’s talking about core inflation (which usually excludes volatile things like energy) and how consumer demand might eventually drop once savings run out. This option talks about unrelated sectors like energy or commodities, so it doesn’t strengthen the argument about savings and interest rates.
C. Surveys indicate that many consumers in Country X do not fully understand how interest rate changes affect their day-to-day expenses.
Interesting info, but not useful here. Even if people don’t understand interest rates, what matters is whether their behavior (spending or saving) actually changes when rates go up. The economist isn’t arguing about awareness but he’s talking about excess savings delaying the impact. So this doesn’t help the case.
D. Businesses in Country X have begun raising prices primarily in response to wage pressures rather than increased demand.
This actually weakens the economist’s argument a bit. Why? Because it suggests inflation is not being driven by consumer demand, which is the part rate hikes target. If businesses are hiking prices due to wages, not spending, then rate hikes might genuinely be less effective. That would support the opposite of what the economist is claiming.
E. Central banks in countries without recent stimulus programs have also struggled to bring down inflation through interest rate increases.
Sounds useful, but it weakens the economist’s specific reasoning. The economist is saying stimulus cash is what’s making the difference in Country X. But this option says even countries without stimulus are struggling. That suggests maybe the problem isn’t savings, which goes against the economist’s claim.
After reviewing all of the answer choices, it appears A) is the best answer option even though perhaps not the most satisfying but with others clearly wrong, A is our answer.
Answer: A
12 Feb 2026, 10:26
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Bunuel I think that the language in option A is misleading. It is stated in the option A : "In previous decades, interest rate hikes took up to 18 months to fully impact inflation, particularly in economies where household savings were low.". From this statement it appears that higher the savings, longer the time required to impact the inflation. In the solution exactly it has been explained in exactly reverse way but I think from the statement of option A it appears that the time and savings has an inverse relationship.
