The Layers dropdown box displays all the layers that exist in your document and allows you to select any of them. There is no limit to the number of layers you can create, nor the names you can give them. Layers are created and named using the Document Properties dialog, Layers tab.
The Layers dropdown box performs 2 functions:
When no objects are selected it displays your current working layer, i.e. the layer onto which any newly drawn objects will be placed. Selecting a new layer from the dropdown box will change the working layer. The name of the current working layer is always displayed in the Template Status field in the Status Bar.