The multiplier effect is an economic term referring to how an increase in one economic activity can cause an increase throughout many other related economic activities.There are several ways to envision this in the economy. Let’s say SuperTech Company introduces a new product with high sales. SuperTech’s success leads to growth for its raw materials suppliers. That in turn causes growth in machinery to extract more raw materials. And that causes growth in yet other industries. This growth upon growth is the multiplier effect. Similarly, SuperTech’s new growth creates greater income for its employees. These employees spend a portion of their higher income on new things, such as restaurants, clothing and cars. This generates new income for all the suppliers and employees in supporting industries. The accumulated new income is much greater than the initial new income. The multiplier effect is also at work when the banking industry lends money to customers. For example, if Mr. Gates deposits $100 into a bank, the bank must by law hold part of that in reserve, but can lend the rest of it back out. If it it must hold 20% in reserve, it can lend out 80%, or $80. That $80 may be spent several times, but eventually, someone puts it in another bank. This bank keeps 20%, or $16, and lends out $64. This cycle repeats several times. After all the depositing and lending, Mr. Gates’ $100 could become several hundred dollars in deposits.