Answer to Question #175166 in Economics for Vivianne

Question

2 a.     A group of people find themselves stranded on a desert island, where there is fresh water, food, and nice weather. They all undertake various activities including producing and foraging for food, and offering services such as entertainment and haircuts. They have with them a large box of pumpkin seeds which they decide to use as their currency. The seeds can also be eaten, or planted and more seeds harvested and again used for money, eating, or planting further.

i.         In this island economy, what would be evidence that there was inflation

ii.         Islanders notice that every September inflation seems to increase rapidly, provide a plausible explanation for this.

Answer 1

i. In this island economy, the ability to plant and harvest new "money" would be evidence that there was inflation.

ii. The fact that islanders notice that every September inflation seems to increase rapidly can be explained with the harvest of pumpkins and its seeds in this month, as a result much more money is created.