Final answer:
A firm experiencing difficulty in paying its debts is facing a liquidity challenge. An increase in money supply can lead to lower interest rates. Economic downturns can cause job losses and financial distress, while a deficit represents a government's annual revenue shortfall. The correct answer is option C).
Step-by-step explanation:
When a firm fails to pay its debts, or pays them only with difficulty, we say the firm is experiencing a liquidity challenge. This term refers to the company's struggle to convert its assets into cash to meet short-term obligations. A liquidity challenge does not necessarily mean the company is insolvent, which refers to a situation where the firm's liabilities exceed its assets, but it indicates that managing cash flows is problematic for the company.
In the context of the financial market, a change that will lead to a decline in interest rates is a rise in supply of funds. This is because an increase in the supply of funds, all else being equal, will lead to lower borrowing costs, as lenders compete to provide loans.
During economic downturns, such as recessions or depressions, production slowdowns can force firms to lay off workers or cut wages. This has significant financial and personal costs for the affected individuals and can have a ripple effect on the overall economy. The 2008-2009 Great Recession is a prime example of how financial stress in banks can lead to a decreased availability of loans, harming sectors that rely on borrowed funds.
A deficit is defined as the annual budget shortfall between revenues and expenditures. It is different from the debt, which is the overall amount owed by the government due to past borrowing.