ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The SDR is an international reserve asset created by the IMF to supplement the official reserves of its member countries. The SDR is not a currency. It is a potential claim on the freely usable currencies of IMF members. As such, SDRs can provide a country with liquidity.

Detailed explanation-2: -The currency value of the SDR is determined by summing the values in U.S. dollars, based on market exchange rates, of a basket of major currencies (the U.S. dollar, Euro, Japanese yen, pound sterling and the Chinese renminbi).

Detailed explanation-3: -The IMF uses the SDR as its unit of account for all transactions. Drawing on the IMF by a country raises the fund’s holdings of that country’s currency but lowers its holdings of another country’s currency by an equal amount.

Detailed explanation-4: -Today, the U.S. dollar isn’t the only reserve currency designated by the IMF and other global organizations. The euro, Chinese renminbi, Japanese yen, and British pound sterling are all popular as reserve currencies, due to the sizes of their economies.