When the Federal Reserve buys bonds on the open market, the money supply increases, which can lead to a number of economic effects. Specifically, as banks receive new reserves from the Fed’s bond purchases, they have more money to lend. This increase in available funds typically lowers interest rates, making borrowing cheaper for businesses and consumers.
As a result, investment spending tends to increase because businesses take advantage of the lower interest rates to finance new projects and expansions. Consumers, too, might increase their spending based on cheaper loans for things like homes or cars.
With the increase in investment spending, aggregate demand in the economy shifts to the right. This means that overall demand for goods and services increases, which can lead to higher production, increased employment, and potentially even higher inflation if the economy is already operating near full capacity.
In conclusion, the correct interpretation after the Federal Reserve buys bonds is that the money supply increases, causing an increase in investment spending, which subsequently shifts aggregate demand to the right.