QUESTION

Medium

Economy

Prelims 2024

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?

Select an option to attempt

Explanation

  • Statement-I:  This statement is correct. If the United States of America (USA) were to default on its debt, holders of US Treasury Bonds would not be able to exercise their claims to receive payment. This statement is correct because, in the event of a default, the government would not be able to fulfil its debt obligations, meaning bondholders would not receive the payments they are due.

  • Statement-II: This statement is correct. The US government debt is not backed by any hard assets, but only by the faith of the Government. This statement is also correct. US Government debt, such as Treasury Bonds, is backed by the full faith and credit of the US Government rather than any specific physical assets.

  • Statement II explains Statement I because the faith and credit of the US Government are the guarantees behind its debt. If this faith is shaken or if the government defaults, bondholders cannot claim any specific assets to recover their investment, hence they would not receive their payments.

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