Numerical answer
Five sentences, numbered 1 to 5, are given below. Four of them can be arranged into a coherent paragraph; one does not fit. Key in the number of the sentence that does NOT fit.
1. Interest rate decisions by a central bank ripple through an economy with a considerable lag, often taking twelve to eighteen months to show their full effect.
2. This delay means a central bank must act on a forecast of where inflation is heading, not merely on where it currently stands.
3. Commercial banks, meanwhile, are required to maintain a minimum capital reserve as a buffer against unexpected loan defaults.
4. Acting only on current data risks a central bank tightening policy just as the economy is already slowing from earlier decisions, overcorrecting in the process.
5. This is why central bank communication about future intentions has become as closely watched by markets as the rate decisions themselves.
1. Interest rate decisions by a central bank ripple through an economy with a considerable lag, often taking twelve to eighteen months to show their full effect.
2. This delay means a central bank must act on a forecast of where inflation is heading, not merely on where it currently stands.
3. Commercial banks, meanwhile, are required to maintain a minimum capital reserve as a buffer against unexpected loan defaults.
4. Acting only on current data risks a central bank tightening policy just as the economy is already slowing from earlier decisions, overcorrecting in the process.
5. This is why central bank communication about future intentions has become as closely watched by markets as the rate decisions themselves.
Show answer and solution
Answer: 3
Sentences 1, 2, 4 and 5 build a single argument about policy lags: the lag exists (1), so banks must act on forecasts (2), acting on current data alone risks overcorrection (4), which is why forward guidance matters (5). Sentence 3 introduces an unrelated fact about commercial bank capital reserves, which has no connection to the lag-and-forecasting argument the other four sentences develop.
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