Suppose that the reserve ratio is 20%. If Holly deposits $1,000 of cash in her checking account and her bank lends $600 to Freda, the money supply:

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When Holly deposits $1,000 in her checking account, the bank can hold 20% of that ($200) in reserve and loan out the remaining $800. If the bank lends $600 to Freda, the money supply increases by $600, because Freda now has $600 in her account, which she can spend or use to make further deposits. Thus, the initial deposit of $1,000 has resulted in a total increase in the money supply of $600, which is a multiple of the original deposit (in this case, a money multiplier of 3).

Suppose That the Reserve Ratio Is 20