Directions : Read the passage carefully and answer the questions given below it. Certain words/ phrases have been given in bold to help you locate them while answering some of the questions.

How often have we heard our grandparents reminisce about the good old days when things were so much cheaper? Everything seems to have been available at a fraction of what it costs today, be it rice, potatoes, mangoes, petrol or utensils. A kilo of sugar that could have been bought for Rs. 2 in the 1970’s currently costs Rs.40, while a dozen bananas that you could have bought for just Rs.10 about 20 years ago, will now cost you Rs.35.

The quantity of a commodity that a rupee used to buy years ago has contracted. In other words, the rupee has lost its purchasing power. The reason for this loss is largely macro-economic and linked to aggregate demand and supply dynamics, government borrowings, exchange rate and interest rates. Typically, the rupee loses its purchasing power when there is a general increase in the economy’s price level, technically termed as inflation. Inflation is not only a cause of concern for the RBI and the government, it also severely impacts the value of the investment portfolios and can upset any deferred purchase plans.

For example, in 2010, painting your house cost Rs.40,000. You deferred the plan for a year and kept the amount in your savings account. In 2010-11, inflation went up by 9.6% (on an average). So, the expense of the paint job increased to Rs.43,825, but you only have Rs.41,400 in your bank account. Due to the fall in the value of money, you will now need to cough up an extra Rs. 2,425 for the same work.

Let us look at how you can estimate the purchasing power of money. This concept rests on the theory of discounting, which is the reverse of the compounding theory. In discounting, the amount receivable at some future date is worked back to the current time period. The future amount is discounted to the current period using a rate known as the discounted yield.

Say, someone promises to pay you Rs. 1,000 a year from now. The interest rate offered by your bank is 9%. Using the bank’s interest rate as the discounted yield, you can work out the current or present value of Rs.1,000, which comes out to be Rs. 917.43.

If, instead, you receive Rs.1,000 now, you could invest it at 9% and after one year, you will receive Rs.1,090. The concept has varied applications in investment and financial planning. It is used by banks for determining the home loan EMIs and is also used by financial planners for estimating the returns from money back insurance policies, mutual fund SIPs and bond yields.

Looking at the value of the rupee, the rate of inflation prevailing in the economy is used as the discounted yield for determining its purchasing power.

Q:

Which of the following statements is false in the context of the given passage?

• 1
  Structural reforms and oil prices are responsible for increase in inflation.
• 2
  Inflation in India was on top in 2015.
• 3
  The growth in the Asia–Pacific region will be driven by improved growth in a range of developing economies.
• 4
  Both 1) and 2)
• 5
  Other than given options