promise rupees 12000 per month and it decreases every year by 15% find his salary after 2 years
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Answer:
If we have the option of receiving $100 today, or $100 a year from now, we will choose to get the money now. There are several reasons for our choice to get the money immediately.
First, we can use the money and spend it on basic human needs such as food and shelter. If we already have enough money to survive, then we can use the $100 to buy clothes, books, or transportation.
Second, we can invest the money that we receive today, and make it grow. The returns from investing in the stock market have been remarkable for the past several years. If we do not want to risk the money in stocks, we may buy riskless Treasury securities.
Third, there is a threat of inflation. For the last several years, the rate of inflation has averaged around 3% per year. Although the rate of inflation has been quite low, there is a good possibility that a car selling for $15,000 today may cost $16,000 next year. Thus, the $100 we receive a year from now may not buy the same amount of goods and services that $100 can buy today. We can avoid this erosion of the purchasing power of the dollar due to inflation if we can receive the money today and spend it.
Fourth, human beings prefer to get pleasurable things as early as possible, and postpone unpleasant things as much as possible. We can use the $100 that we receive today buy new clothes, or to go out for dinner. If you are going to get the money a year from now, you may also have to postpone all these nice things.
Then there is the uncertainty of not receiving the money at all after waiting for a year. People are risk-averse, meaning, they do not like to take unnecessary risk. To avoid the uncertainty, or the risk of non-payment, we would like to get the money as soon as possible.
Banks and thrift institutions know that to attract deposits from investors, they must offer some kind of incentive. This incentive, the interest, compensates the depositors for their inability to spend their money immediately. For instance, if the bank offers a 5% rate of interest to the depositors, the $100 today will become $105 after a year.