Correct Circuit Topology Interpretation:
For the answer (c) to be correct, the diagram must be interpreted as:

• Ammeter A₂: Measures the Total Current (Source Current).
• Ammeter A₁: Measures the branch current for the Fixed Resistor (parallel to the Rheostat).
• Rheostat: Is in the other parallel branch.

Step 1: Resistance Analysis
When the resistance of the rheostat increases:

• The equivalent resistance of the parallel combination increases.
• Therefore, the Total Circuit Resistance Increases.

Step 2: Total Current (I₂)
Since Total Resistance has increased, the current drawn from the source decreases.
→ I₂ will decrease.

Step 3: Terminal Voltage (V)
V = EMF - Itotal * r (internal resistance).
Since the total current Itotal (which is I₂) decreases, the internal voltage drop decreases. This leaves more voltage available at the terminals.
→ V will increase.

Step 4: Branch Current (I₁)
Ammeter A₁ is on the fixed resistor branch. I1 = V / Rfixed.
Since V has increased and R_fixed is constant, the current through this branch must increase.
→ I₁ will increase.