Question

1- explain what happened to prices on island? why did the prices do this and what is phenomeno called? In the real world explain why inflation discourages people from saving thier money?

Answer 1

Inflation means increase in price level in economy. And savings means amount of income not consumed. So inflation makes it costlier to save when return on savings i.e interest rates are not very high. This can be explained with example.

Suppose we have$100 in bank as savings and we earn 5% p.a interst. By the end of the year we will have $105 instead of $100. If the price increase is 8%that year, So commodity which was $100 last year will be $108 this year, hence it cannot be brought with savings earnings of interest rate 5%. Hence this is why inflation discourages savings.