Suppose the required reserve ratio is 40%. a $5 million deposit allows commercial banks to create a maximum total of in deposits.

$12.5 Million Deposits

Explanation:

Commercial Banks are able to create Final Deposits many times their Initial Deposits, by Process of 'Money Multiplier' / 'Credit Creator'.

Final Total Deposits = (1/LRR) x Initial Deposits.

It happens as money (all payments & receipts) circulate through unified banking system. Central bank receiving deposits of lets say Rs 100 retains Legal Reserve Ratio eg 10% (CRR, SLR = portion of reserves with central banks & commercial banks themselves)i.e Rs 10 & lend the remaining Rs 90, which spent by someone comes back in bank as someone else's income.The cycle continues till Final Deposits = 1/LRR x Initial deposits .

Final Deposits = 1/LRR x Initial deposits

Final Deposits = (1/0.40) x 5

= 2.5 x 5  

$12.5 Million

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