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Macroeconomics

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What is Gresham's Law?

MACRO-BQIYGS

In the kingdom of Winterfell, a newly formed ruling party has committed to a promise that all newly minted coins will contain their full face value of gold. This new policy was initiated because their previous ruler had substantially debased their coinage - in other words, melted down the gold coins and re-minted ones with less gold than what was stated on the coins. The new government followed through on their promise and over the last year all newly minted coins contained the correct face value of gold.

Which of the following statements correctly reflects what would happen to the newly minted coins according to Gresham's Law?

A

There would be some initial confusion regarding the value of the newly minted and debased coins. However, since they all have the same face value, all would be used in trade and yield a similar value.

B

The newly minted coins would revive economic activity through trade and commerce.

C

There would be some initial confusion regarding the value of the newly minted and debased coins. Despite having the same face value, they would be traded according to their intrinsic value.

D

A significant amount of the newly minted coins would disappear from circulation.