They've even magicked up fake Indian tribe names.
Punky goes on a camping trip with her ethnically inclusive friends, and they promptly get lost in the wilderness. The group takes refuge in a cave, and Punky tries to pass the time (until, presumably, they starve to death) by telling a ghost story about four kids that get lost in the woods and find refuge inside of a cave. It's either a bad attempt by Punky to be meta, or they couldn't afford a second set. Either way, if kids looked down for just a second, or took a bathroom break at the wrong moment, it would have been easy to miss the fact that what happens for the remainder of the episode wasn't actually happening to Punky and friends, which is important for terrifying reasons that will soon become apparent.
Punky's story is quickly interrupted by a group of Native Americans, who are apparently synonymous with cavemen, and they have a much better story they want to tell about unspeakable horror.
"This one is called 'The Freeeee Blankets'."
The kids hear a story of an evil spirit that, as it happens, lives in the cave and that, as it happens, can be killed only by Punky Brewster. The kids, with little concept of mortality and poor decision-making skills, head deeper into the cave. Along the way they encounter the type of horrors you would expect from a sitcom, like kindly but unnerving lost souls and some spiders.