UPSC Prelims 2024 · GS Paper I

Question 51: Economy and Social Development

Consider the following statements :

Statement-IIf 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-IIThe 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 ?

aBoth Statement-I and Statement-II are correct and Statement-II explains Statement-I

bBoth Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I

cStatement-I is correct, but Statement-II is incorrect

dStatement-I is incorrect, but Statement-II is correct

AnswerUPSC’s answer is (a).

UPSC's key treats both statements as correct, with the second explaining the first. US Treasury bonds are backed by the full faith and credit of the government, not by any hard assets such as gold or property. So if the government defaults, bondholders have no specific asset against which to enforce their claim. Remember: sovereign debt rests on the state's promise, not on collateral.

I. UPSC's key reads this as holders having no assets to claim against in a default.
II. US debt is backed by the government's faith and credit, not hard assets, and this explains Statement-I.

How you could have got this

If you were sure Statement-I is correct, (d) goes. Then judge the second statement; if it is correct too, decide whether it explains the first.

What you needed to know: UPSC's key reads this as holders having no assets to claim against in a default.

Which options go is worked out from UPSC’s key and the options, not by a model.

Why each option is right or wrong

(a) Right: debt is backed only by the government's faith, and that is why holders have nothing to claim against.
(b) Wrong: Statement-II is the reason for Statement-I, so it does explain it.
(c) Wrong: Statement-II is correct.
(d) Wrong: UPSC's key accepts Statement-I as correct.

Worth knowing: Bondholders keep their legal claim after a default, so Statement-I can be read as false; UPSC's key reads it as having no hard assets to seize.

Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2024, General Studies Paper I, Series A. The paper on upsc.gov.in.