Economics • Economic BasicsMedium
Which of the following describes 'Gresham's Law' regarding currency circulation?
A. Good money drives out bad money when inflation is high.
B. Bad money drives out good money from circulation when both are legally accepted at a fixed exchange ratio.✓ Correct Answer
C. Paper currency depreciates in direct proportion to the growth rate of the money supply.
D. Gold standards automatically stabilize international trade imbalances.
💡 Solution & Explanation
Gresham's Law posits that bad money drives out good money from circulation when both possess equal legal tender status at a fixed exchange ratio, causing intrinsic-value currency to be hoarded. Under such conditions, overvalued currency remains actively transacted in the market.
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