Statement (a):** "When the interest rate increases from i0 to i1, the opportunity cost of holding money increases."

Here's an analysis of the statements based on the provided diagram: Statement (a): "When the interest rate increases from i_0 to i_1, the opportunity cost of holding money increases." The opportunity cost of holding money is the interest income foregone by not investing that money in an interest-bearing asset (like a bond). As the interest rate (i) increases from i_0 to i_1, the potential return from holding bonds or other interest-bearing assets also increases. Therefore, the cost of choosing to hold money (which typically earns no interest) instead of these assets increases. This statement is correct. Statement (b): "When the money supply decreases from M_0 to M_1, this means that people would prefer to hold less money and more bonds." The diagram shows a movement along the money demand curve 'L' from E_0 to E_1. This movement corresponds to a decrease in the quantity of money demanded from M_0 to M_1 and an increase in the interest rate from i_0 to i_1. When the interest rate increases, the opportunity cost of holding money rises (as explained in statement a). This makes holding bonds (which now offer a higher return) more attractive relative to holding money. Consequently, people would prefer to hold less money and more bonds to take advantage of the higher interest rates. This statement is correct. Both statements (a) and (b) are correct. The correct option is that both (a) and (b) are correct. Send me the next one 📸