People will normally invest in various financial assets, including bonds. Meanwhile, they hold money to facilitate transactions.

(a) The rights and obligations of holding financial assets are specified in financial contracts. Now, legal experts discover a major shortcoming in these contracts, which implies asset holders will suffer from higher risks. What is the impact on money demand upon announcement of the finding? Briefly explain.

(b) How the LM curve will be affected, assuming a fixed money supply? Draw a diagram to illustrate. You should also draw the diagram for the money market.