[amp_mcq option1=”When there is a developed banking system” option2=”The people have full faith in the government” option3=”When it is transient” option4=”The demand for money is dominated by the supply” correct=”option3″]
Gresham’s law states that “bad money drives out good.” This means that when two coins are in circulation with different intrinsic values, the coin with the lower intrinsic value will tend to drive the coin with the higher intrinsic value out of circulation.
The correct answer is: C. When it is transient.
Gresham’s law is most likely to operate when the difference in intrinsic values between the two coins is small and the coins are indistinguishable from each other. In this case, people will be more likely to use the coin with the lower intrinsic value, as it is worth more in terms of its purchasing power. This will cause the coin with the higher intrinsic value to disappear from circulation, as people will hoard it or melt it down.
Option A is incorrect because a developed banking system does not necessarily prevent Gresham’s law from operating. For example, during the hyperinflation in Germany in the early 1920s, people were still able to use banknotes, even though they were worth very little.
Option B is incorrect because people do not need to have full faith in the government for Gresham’s law to operate. For example, during the American Revolution, people were still able to use British coins, even though they did not have full faith in the British government.
Option D is incorrect because the demand for money does not need to be dominated by the supply for Gresham’s law to operate. For example, during the hyperinflation in Zimbabwe in the late 2000s, the demand for money was very high, but the supply of money was even higher, and Gresham’s law still operated.