Gresham’s Law states thatgood money drives bad money out of circulation. none of the options. if a country bases its currency on both gold and silver, at an official exchange rate, it will be the more valuable of the two metals that circulate. bad money drives good money out of circulation.
bad money drives good money out of circulation.
Option 4 – bad money drives good money out of circulation – is the correct statement for Gresham’s Law.
Gresham’s Law is a monetary principle that states that when two forms of currency (or money) circulate together, with equal legal tender status, the form of currency with a higher value will be hoarded or exported, while the form with a lower value will remain in circulation. This principle was named after Sir Thomas Gresham, a Tudor financier who observed this practice during the reign of Queen Elizabeth I of England.
For example, if a country has two types of coins in circulation, one made of pure gold and the other made of copper with a gold coating, and both coins are legal tender, people will start hoarding the pure gold coins as they have more value, and they’ll use the copper coins for transactions instead. This leads to the good money (pure gold coins) being taken out of circulation, and the bad money (gold-coated copper coins) remaining in circulation.
So, Gresham’s Law suggests that when there are two forms of currency in circulation, people will use the cheaper or lesser valuable money to transact and hoard or export the more valuable money. This leads to the degradation of currency quality in circulation, as bad money drives good money out of circulation.
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