A company runs an application on an Amazon EC2 instance that requires 250 GB of storage space. The application is not used often and experiences small spikes in usage on weekday mornings and afternoons. The disk I/O can vary, with peaks reaching a maximum of 3,000 IOPS. A Solutions Architect must recommend the most cost-effective storage solution that delivers the required performance. Which storage solution should the Solutions Architect recommend? ( this is part of assessment, unable to follow)

is it possible to Convert the snapshot into an AMI with EBS Snapshot?

does "AWS does not support shrinking EBS volumes" ? why can i not reduce if my requirement shrinks ( i understand there can be loss of data, but I am ok with it)

does AWS allow to detach root volume ? ( even if it is stopped state)

Free tier what we are using comes under On-demand i guess. Is there a possibility that this can also be terminated anytime like spot instance

No. On demand instances are not interrupted like spot instances.