The "multiplier effect" refers to the manner in which the supply of money circulating throughout the economy grows as financial institutions, mainly banks, lend out money they have attained through customer deposits. The money that banks lend out is that which is accumulated over time from customer deposits. Banks will routinely maintain a capital reserve--in effect, set aside a certain percentage of their total holdings--in the event of an emergency but also as a requirement dictated by the Federal Reserve Board of Governors and by the multinational Basel Accord, which stipulates that each participating country will require banks to maintain a reserve as a hedge against financial crises, such as occurred as recently as 2007–2008. That money, the majority of what each bank holds, is available for lending purposes, which, as noted, expands the aggregate money supply.
The formula by which the multiplier effect is calculated is dependent upon reserve requirements and so varies over time. That amount, the amount held in reserve, is divided into the total amount of deposits. As money is loaned out, that money is deposited, in turn, into other accounts and becomes available for additional lending. Hence, the original deposit creates a multiplier effect through the process of deposits and lending. Over time, the value of the initial deposit grows several times over as that initial seed money works its way through the economy. To reiterate, though, the multiplier effect is a product of the value of deposits divided by the reserve ratio.