Which principle states that bad money drives out good money?

Which principle states that bad money drives out good money?

• A. Gresham's Law
• B. Supply-side Economics
• C. Diamond-Water Paradox
• D. Invisible Hand

Answer: (A)

Gresham's Law explains what happens when more than one form of money is accepted as payment at the same face value. If one type has a lower intrinsic value than its nominal value (bad money) and the other has a higher intrinsic value (good money), people will spend the bad money and save or hoard the good money. Over time, the bad money stays in circulation while the good money disappears from everyday use. This happens because holders try to preserve real value rather than face value, especially when the government fixes their values. For example, coins that look identical in value but differ in metal content lead people to spend the lower-value coin and keep the higher-value one, gradually driving the valuable money out of general circulation. Other listed concepts describe different ideas about markets, prices, or incentives and don’t specifically explain how circulating money with the same nominal value interacts with intrinsic worth.

Gresham's Law explains what happens when more than one form of money is accepted as payment at the same face value. If one type has a lower intrinsic value than its nominal value (bad money) and the other has a higher intrinsic value (good money), people will spend the bad money and save or hoard the good money. Over time, the bad money stays in circulation while the good money disappears from everyday use. This happens because holders try to preserve real value rather than face value, especially when the government fixes their values.

For example, coins that look identical in value but differ in metal content lead people to spend the lower-value coin and keep the higher-value one, gradually driving the valuable money out of general circulation. Other listed concepts describe different ideas about markets, prices, or incentives and don’t specifically explain how circulating money with the same nominal value interacts with intrinsic worth.