International Financial Institutions And Global Business Strategies Practice Test

What are Special Drawing Rights and how do they function within the IMF framework?

SDRs are international reserve assets allocated by the IMF; they can be exchanged among member countries for freely usable currencies to meet balance-of-payments needs; value is based on a basket of major currencies. SDRs are a form of currency for everyday transactions. SDRs are the IMF's internal accounting unit used only for IMF's own lending operations. SDRs are a loan instrument with a fixed interest rate.

Correct Answer:

Explanation:

Special Drawing Rights are an international reserve asset created by the IMF to supplement official reserves. They’re allocated to member countries and can be exchanged among members for freely usable currencies to meet balance-of-payments needs. The value of an SDR is determined by a weighted basket of major currencies, and this basket is updated periodically by the IMF. SDRs are not used for everyday transactions, nor are they simply an IMF internal accounting unit, and they are not a loan instrument with a fixed rate. In practice, countries hold SDRs as part of their reserves and may swap them for actual currencies or use them as a way to bolster liquidity, with an interest component reflecting the rates of the basket currencies.

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