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.