Liability management, also known as purchased liquidity strategy, involves borrowing immediately spendable funds to cover all anticipated demands for liquidity. This strategy allows a firm to keep the volume and composition of its assets portfolio unchanged if it is satisfied with the assets it currently holds. In the case of Loud bank, the withdrawal of $200 million by its depositors presents a liquidity challenge. However, if the bank’s management decides to borrow an amount equal to the withdrawal, the size of the bank’s balance sheet would remain unchanged. This is because the decrease in deposits due to the withdrawal would be offset by the increase in other liabilities due to the borrowed funds. Therefore, the total liabilities and equity of the bank would remain the same, resulting in no change in the size of the bank’s balance sheet.

Choice A is incorrect. The size of the bank’s balance sheet will not increase. This is because the bank is borrowing funds to cover a withdrawal, not to expand its assets or liabilities beyond their current levels.

Choice B is incorrect. The size of the bank’s balance sheet will also not decrease. Although there has been a withdrawal, this has been offset by borrowing funds, so the overall size of the bank’s balance sheet remains unchanged.

Choice D is incorrect. We can establish from the information provided that there would be no change in the size of Loud Bank if it borrows an amount equal to the withdrawal. This strategy allows Loud Bank to maintain its current asset portfolio and meet liquidity demands without altering its balance sheet’s overall size.