Final answer:
When the central bank performs an open market operation by buying bonds, it increases the bank's reserves, which are then loaned out. This action triggers the money multiplier effect, leading to a cumulative increase in the overall money supply that exceeds the initial amount of the bond purchase.
Step-by-step explanation:
In a fractional reserve banking system with no excess reserves and no currency holdings, when the central bank buys $100 million of bonds through an open-market operation, the effects can be best described as:
d. reserves increase by $100 million, and the money supply increases by $100 million.
When the central bank purchases bonds from commercial banks or other financial institutions, it credits the sellers' reserve accounts with the payment amount, in this case, $100 million. This action directly increases the reserves held by the banking system by the same amount ($100 million) because the banks receive payment for the bonds in the form of reserves.
Following this purchase, banks now have more reserves, and according to the fractional reserve system, they can lend out a portion of these additional reserves while maintaining the required reserve ratio. As a result, when banks lend out a portion of these increased reserves, the money supply expands. However, the money supply doesn't increase by more than the initial $100 million injected into the system by the central bank because of the money multiplier effect stemming from the fractional reserve system.
Therefore, the most accurate description of the effects in this scenario is that reserves increase by $100 million, and the money supply also increases by $100 million.