According to M1 and M2 measures of money supply in the State,
M1 = Amount in Currency, Travellers' checks and Checking account deposits (non governmental)
M2 = Amount inclusive of M1, Time deposit, Savings Deposits and Money Money mutual funds.
Many of the banking system in the world, including the one used in U.S is basically a fractional reserve banking system. It means the central bank will decides as part of the monetary policy the reserve ratio of the bank deposits to be retained with the central bank for the purposes of liquidation/withdrawal by depositors.
This reserve ratio is one of the crucial instruments at central bank disposal to influence market determined interest rates, to increase/decrease money supply in the market and effectively controlling economy expansion or recession.
For every dollar you deposited in your preferred bank, the bank might pools the money and loans it out, after withholding the portion of the money as required by the bank reserve ratio. Then, the borrower who granted the loan might uses the loaned money to settle his/her debts or uses it to buy stuffs. One way or another, most probably some portion of the money will get bank to banks as deposits. The bank then can repeat the cycle again and again, until there is no more excess reserves.
The monetary base includes currency notes, coins, and reserve deposits at the central bank.
The change effect of one unit of monetary base is multipled by a number called the monetary multiplier because of the money circulation depicted above.
Basically, the monetary multiplier is dependent on the bank reserve ratio and the currency ratio. Currency ratio is the portion of money borrowers hold in cash without re-deposited it back to the system.
Money Multiplier = (1+c)/(r+c)
Where c is the currency ratio and r is the reserve ratio
And by that
Change in quantity of money = Change in monetary base x Money Multiplier
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