Final answer:
Borrowing is the external source of liquidity among the given options. It helps firms raise capital while maintaining control and is not beholden to shareholders. A rise in both demand and supply for loans in the financial markets increases the quantity of loans made and received. The correct option is C.
Step-by-step explanation:
The external source of liquidity from the options given is c. Borrowing. When a firm requires financial capital, it has various options. One can be to issue stock which means selling company ownership to the public and becoming responsible to a board and the shareholders.
However, this may dilute control over the firm's operations. Borrowing, either through banks or by issuing bonds, involves committing to scheduled interest payments but allows the company to maintain complete control as it is not beholden to shareholders. This method of raising funds is an external source of liquidity as it comes from outside the firm, unlike sales of services or products which are internal sources.
About changes in the financial market that can lead to an increase in the quantity of loans made and received, these include a rise in demand for loans and a rise in the supply of loans available in the market. Both these factors can lead to an increase in the borrowing and lending activities within the financial markets.