Whenever you see an underlined portion beginning with WHICH, the question is almost certainly testing MODIFIERS.

WHICH is a relative pronoun, and it should modify the noun (or noun phrase) directly before it. In this case, the noun phrase directly before WHICH is "the key interest rate." This would imply that the interest rate itself is lowering housing prices - this is nonsensical. We need to change the modifier structure to suggest that the action of RAISING the key interest rates is what is lowering the housing prices.

A) which has the curious effect of actually lowering housing prices instead of raise them
The "which" is a misplaced modifier. Incorrect.

B) an action that has the curious effect of actually lowering housing prices rather than raising them
This answer choice switches the modifier structure. Here, "an action" can now refer to the entire idea of the Federal Reserve raising the interest rates. Correct.

C) which has the curious effect of actually lowering housing prices instead of raising them
The "which" is a misplaced modifier. Incorrect.

D) which rather than raising housing prices actually has the curious effect of lowering them
The "which" is a misplaced modifier. Incorrect.

E) an action that has the curious effect of actually lowering housing prices instead of raise them
This answer choice fixes the "Which" issue, but "lowering instead of raise" is not parallel.

The correct answer is B.

For more on the use of "WHICH" as a noun modifier, see here:

https://www.beatthegmat.com/amounting-an ... tml#554774

https://www.beatthegmat.com/emily-dickin ... tml#563839

https://www.beatthegmat.com/noun-phrase- ... tml#570781

https://www.beatthegmat.com/question-in- ... tml#767098