Question

UPSC Prelims 2024 Question:

Consider the following statements

Statement-I: If the United States of America (USA) were to default on its debt, holders of US Treasury Bonds will not be able to exercise their claims to receive payment.

Statement-II: The USA Government debt is not backed by any hard assets, but only by the faith of the Government.

Which one of the following is correct in respect of the above statements?

1. Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I
2. Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I
3. Statement-I is correct but Statement-II is incorrect
4. Statement-I is incorrect but Statement-II is correct

Answer (Detailed Solution Below)

Option 4: Statement-I is incorrect but Statement-II is correct

Detailed Solution

Explanation:

If the USA were to default on its debt holders of US treasury bonds will not be able to exercise their claims to receive payments. a default on one government bill, note or bond does not trigger a default across all of the government’s debt, known as “cross default,”. Still, any collateral affected by a default would need to be replaced. So, statement 1 is not correct.
The USA Government debt is not backed by any hard assets, but only by the faith of the Government. So, statement 2 is correct.

Therefore, option (4) is the correct answer.

Subject: Economics| Money and Banking

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