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. A. Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
2. B. Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
3. C. Statement-I is correct, but Statement-II is incorrect
4. D. Statement-I is incorrect, but Statement-II is correct

Answer: A

Explanation

Both Statement-I and Statement-II are correct, and Statement-II explains Statement-I. Statement-I is correct because a sovereign default means the government fails to meet its financial obligations, rendering bondholders unable to receive their promised payments. Statement-II is also correct; the US dollar is a fiat currency, and US government debt is backed by the ‘full faith and credit’ of the US government, not by physical assets like gold. If the government defaults, this ‘faith’ is broken, directly explaining why bondholders would not be paid. This question relates to macroeconomics, public finance, and the nature of modern currency.