UPSC Prelims 2024 · Question 31 of 97
UPSC Prelims 2024 question on US Debt Default Treasury
- ExamUPSC CSE
- Year2024
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicImportant Economic Concepts
- DifficultyHard
- TypeAssertion
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?
Show answer
Answer: A. Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
Statement I – CORRECT: As the national debt has soared, the U.S. Treasury Department has had to borrow more money to pay for government spending by revoking the Debt ceiling. If the United States were to default on its debt, holders of US Treasury Bonds will not be able to exercise their claims to receive payment.
Statement II – CORRECT and is the correct explanation of Statement I: Currencies like US dollars are fiat currency. Fiat money is a government-issued currency that is not backed by a physical commodity such as gold or silver, but rather by the government that issued it. So Treasury Bonds issued by US government are not backed by any hard assets but based on only faith of the government. If the government fails to repay the debt taken, then bond holders would not have the right to exercise their claims to receive payment.
Statement II is the correct explanation of Statement I → Option (a) Both correct and Statement-II explains Statement-I.