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Money multiplier defines the relationship between new excess reserves and the magnified creation of new checkable-deposit money.

Money Multiplier (m) = 1 / (Required Reserve Ratio)

Let the initial deposit be $200. This initial deposit creates new reserves of an equal amount. Let the required reserve ratio be 20%. Therefore only 20% of the reserves are needed to back up the initial $200 deposit. i.e., $40. So excess reserves = $200-$40 = $160.

Maximum checkable deposit creation= Excess Reserves x Money Multiplier =

$160 x 1/0.20 = $800. The excess of reserves creates $800 by making loans. Therefore, $200 of reserves creates a total of $1000.

Thus, the currency deposited with the commercial bank increases the money supply in the economy.