Final answer:
When the Federal Reserve buys bonds in an open market operation and public cash holdings remain unchanged, commercial bank reserves increase. This can potentially lead to an increased money supply through the money multiplier effect, as banks have more reserves to support lending.
Step-by-step explanation:
When the Federal Reserve conducts an open market operation by buying bonds from the public, and the amount of cash held by the public does not change, commercial bank reserves will increase. This is because the process involves the Fed paying for the bonds, and those payments are made to the sellers’ bank accounts, thereby increasing the reserves of those banks. This increase in reserves means the banks now have more funds available to meet reserve requirements, to lend out or to invest, which can lead to a multiplication of deposits throughout the banking system.
Contrary to the scenario where the bank has to hold a specific amount in reserves and its bond purchases forces it to reduce its loans, causing the money supply to decrease, in this case, it's the opposite. The increase in reserves, when the public’s cash holdings remain the same, implies that banks can maintain or even increase their lending activities. More loans mean more deposits, potentially expanding the money supply through the money multiplier effect. The required reserve ratio doesn't necessarily change, nor do the deposits of commercial banks decline. Instead, we would expect the money supply to potentially increase due to the influx of reserves.