Macroeconomics,The Multiplier

Relationship between the Monetary Base and the Money Supply. The multiplier explains why the money supply as excess reserves are added to the banking system. When a bank makes a loan, it creates money, because part of the loan becomes a new deposit.
In practical terms, banks put money in circulation by extending credit. Assume that a bank makes a $100,000 loan and reserves 10% or $10,000 to meet its Reserve Requirement, depositing $90,000 in the borrower's bank. The borrower's bank sets aside a reserve of $9,000, leaving $81,000 available for another loan and another deposit. If carried to its logical extension, the original $100,000 loan would expand into more than $500,000 in deposits and $400,000 in new loans. See also Fractional Reserves.