For example:
when I click on this button I would assume that it shows me all the possible bullets that are in the project folder yet it does not:
nothing shows up
You’re right, it does not constantly index all your assets looking for Prefabs that have top-level objects with a given Component. That might be nice to have, at the expense of the search time.
You’ll have to find the Prefab in your Project folders, and drag the desired Prefab into that slot in the Inspector.
The object picker is pretty basic and lacks… lots of functionality. Any amount of beyond the basics inspector work requires custom editor work.
You may consider addons like Odin Inspector that makes all this a lot easier.