Which economic law states that when coins of unequal intrinsic value are in circulation together, the bad or debased money tends to drive the good money out of circulation?

Introduction / Context:
This question belongs to monetary economics and economic history. It asks about a famous principle that describes what happens when two forms of money, one of higher intrinsic value and one of lower intrinsic value, circulate together at the same face value. The principle explains why people tend to hoard good money and spend bad money. Recognising the name of this law is important for many general knowledge and Indian economy examinations.

Given Data / Assumptions:
- Coins of unequal intrinsic value circulate side by side at the same face value.
- People tend to use one type of coin and hoard or remove the other.
- We must identify the name of the law that states that bad money drives good money out of circulation.
- Options include Wagner's law, Grimm's law, Gresham's law and Keynes' law.

Concept / Approach:
The law that states “bad money drives out good” is known as Gresham's law, named after Sir Thomas Gresham. The idea is that if two forms of commodity money are accepted as having the same face value, people will tend to spend the coins that are overvalued or debased (bad money) and hoard or melt down the higher value coins (good money). Over time, the good money disappears from circulation, leaving mostly bad money. Other named laws in the options relate to different topics such as public expenditure or phonetics, so they can be eliminated.

Step-by-Step Solution:
Step 1: Recall which law is popularly summarised by the phrase “bad money drives out good money”. Step 2: Identify Gresham's law as the monetary principle that states that when both good and bad money are legal tender at the same face value, people will hoard good money and spend bad money. Step 3: Check the other options. Wagner's law refers to the growth of public expenditure with economic development, Grimm's law is related to historical sound changes in linguistics, and Keynes is associated with macroeconomic theories, not specifically this money phenomenon. Step 4: Therefore, the correct answer is Gresham's law.

Verification / Alternative check:
Consider a country where both gold coins and debased alloy coins circulate but both are accepted as equal in terms of face value. Rational economic agents will choose to pay with the alloy coins and keep the gold coins at home, possibly melting them down or selling them later for their metal value. Over time, only the cheaper alloy coins will be seen in the market. This behaviour accurately illustrates Gresham's law, confirming that this is the correct choice among the options provided.

Why Other Options Are Wrong:
Wagner's law is wrong because it deals with the tendency of government expenditure to increase relative to national income as an economy grows, not with currency circulation.
Grimm's law is wrong because it relates to a pattern of consonant changes in the Germanic languages and has nothing to do with economics.
Keynes' law is not the standard name of a monetary principle; Keynes is linked with macroeconomic ideas such as the importance of aggregate demand, not with the specific statement that bad money drives out good.

Common Pitfalls:
Candidates sometimes mix up different named laws and associate Gresham with fiscal policy or Wagner with money, which is incorrect. Memorising the key phrase “bad money drives out good” alongside Gresham's name is a useful memory aid. Another pitfall is to think that the law implies bad money always replaces good under any system, but it specifically applies to situations where both types of money are legal tender at the same face value. Understanding this condition improves conceptual clarity beyond rote memorisation.

Final Answer:
The law that states that bad money tends to drive good money out of circulation is Gresham's law.