Question

"The Fed can expand the economy by buying bonds. This increases the price of bonds, so the interest rate rises, hence so does the return to investment, and this stimulates aggregate demand and output.'Explain whether you think the previous statement is right or wrong using the IS-LM-FE model in both its Classical (long-run) variants and Keynesian variants (where firms meet demand). You do not need to derive anything mathematically. Only use graphs and explain. Describe, in particular, what happens to output, interest rates, consumption, investment, employment and wages when the Fed starts buying bonds.

Fig: 1