What is a liquidity crisis?

A liquidity crisis is characterized by the inability of an entity—whether an individual, company, or financial institution—to meet its short-term financial obligations. This situation arises when there is insufficient liquid cash or cash-equivalent assets available to address debts or operational expenses as they come due. When a liquidity crisis occurs, the affected party may struggle to pay suppliers, employees, or loan repayment obligations, potentially leading to default or bankruptcy if the situation is not resolved.

Understanding liquidity and how it relates to financial health is crucial. Liquidity refers to how quickly and easily an asset can be converted into cash without substantial loss of value. Therefore, during a liquidity crisis, despite potentially having valuable longer-term assets, the immediate availability of cash is what is lacking. This condition often prompts a heightened sense of urgency among stakeholders to secure funding or restructure financial commitments to mitigate the impact of the crisis.

In contrast, the other options describe financial situations or conditions that do not directly pinpoint operational liquidity constraints. For instance, high-interest rates can affect borrowing costs and financial conditions, but they do not solely define a liquidity crisis. Similarly, a shortage of high-value assets or a decrease in stock prices pertains to asset valuation issues rather than immediate cash availability. Thus, option C accurately encapsulates