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crejoc
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'which' refers to 'the key interest rate' ..so A, C and D gone ..

now in B and E ... you use 'rather than' to compare clauses ..so only B is doing that ..

IMO B.
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B

which refer to immediate noun thats why "an action" is required...
rather than is preferred over instead of
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Simple one. B it is. The "raising of the key interest rate", NOT "the key interest rate" itself, has the "curious effect...".
Only B and E convey the proper meaning.
B maintains parallelism and E does not.
B is the answer.
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crejoc
When housing prices climb too quickly, the Federal Reserve often responds by raising the key interest rate, which has the curious effect of actually lowering housing prices instead of raise them, as one might expect.

(A) which has the curious effect of actually lowering housing prices instead of raise them

(B) an action that has the curious effect of actually lowering housing prices rather than raising them

(C) which has the curious effect of actually lowering housing prices instead of raising them

(D) which rather than raising housing prices actually has the curious effect of lowering them

(E) an action that has the curious effect of actually lowering housing prices instead of raise them

The answer is B


Here " the curious effect " was due to the raise that interest rate was given .The effect was not due to the interest rate .
Which in the original sentence refers to the key interest rate so it is clearly worn as the meaning is not clear so A ,C and D are out .
E is not parallel as "lowering housing prices instead of raise them " is wrong here raising should have come .
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More importantly, "which" never typically refers to an action. It's a more rules based observation
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When housing prices climb too quickly, the Federal Reserve often responds by raising the key interest rate, which has the curious effect of actually lowering housing prices instead of raise them, as one might expect.

(A) which has the curious effect of actually lowering housing prices instead of raise them --> Modifier error - this is modifying interest rate rather than modifying the action taken by FR.

(B) an action that has the curious effect of actually lowering housing prices rather than raising them --> Correctly represents the effect of action by FR.

(C) which has the curious effect of actually lowering housing prices instead of raising them --> Modifier error - this is modifying interest rate rather than modifying the action taken by FR.
(D) which rather than raising housing prices actually has the curious effect of lowering them --> Modifier error - this is modifying interest rate rather than modifying the action taken by FR.

(E) an action that has the curious effect of actually lowering housing prices instead of raise them --> Incorrect idiom Usage even when the modifier issue is fixed.
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crejoc
When housing prices climb too quickly, the Federal Reserve often responds by raising the key interest rate, which has the curious effect of actually lowering housing prices instead of raise them, as one might expect.

(A) which has the curious effect of actually lowering housing prices instead of raise them

(B) an action that has the curious effect of actually lowering housing prices rather than raising them

(C) which has the curious effect of actually lowering housing prices instead of raising them

(D) which rather than raising housing prices actually has the curious effect of lowering them

(E) an action that has the curious effect of actually lowering housing prices instead of raise them

Which is always used for information bits in a sentence which is unimportant. It looks important here, so lets eliminate A, C and D
(A) which has the curious effect of actually lowering housing prices instead of raise them
(C) which has the curious effect of actually lowering housing prices instead of raising them
(D) which rather than raising housing prices actually has the curious effect of lowering them


Now we're left with B and E

E has lowering and raise which is not parallel hence eliminate E
(E) an action that has the curious effect of actually lowering housing prices instead of raise them

We're left with B which seems right - may not be the one we wanted but its grammatically correct.
(B) an action that has the curious effect of actually lowering housing prices rather than raising them
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