Final answer:
When the Fed buys bonds, it triggers an expansionary monetary policy that lowers interest rates, raises bond prices, and stimulates investment and net exports, resulting in an increase in the aggregate demand curve in the product market.
Step-by-step explanation:
When the Federal Reserve (Fed) buys bonds in the open market, it is conducting an expansionary monetary policy, which increases the money supply. This action leads to a shift of the demand curve for bonds, resulting in a rise in bond prices and a reduction in interest rates. The lower interest rates stimulate investment and also impact the currency market by reducing the exchange rate, thereby stimulating net exports. This boost in investment and net exports results in a shift of the aggregate demand (AD) curve to the right in the product market of the aggregate demand-aggregate supply model, which is indicative of an increase in aggregate demand.