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StarBank has the following balance sheet ( in millions ) : Assets : Liabilities and Equity: Cash required reserves $ 2 Deposits $ 8 Loans

StarBank has the following balance sheet (in millions):
Assets : Liabilities and Equity:
Cash required reserves $2 Deposits $8
Loans $10 Long-term debt $2
Equity $2
Total assets $12 Total liabilities and equity $12
The average interest earned on the loans is 5.3 percent and the average cost of deposits is 6 percent. Rising interest rates are expected to induce a net deposit drain of +38.2 percent. Borrowing more debt will cost the bank 5.5 percent in the short term.
a) What will be the cost of using a strategy of purchased liquidity management to manage the deposit drain?
b)What will be the size of the bank if a purchased liquidity management strategy is adopted?

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