They may decide to put the money under the mattress or burn it, but usually the money is either spent in the bank or deposited in the bank. If every investor who sells bonds deposits money into the bank, then bank deposits will initially increase by $20 billion. Some of them may spend money. When they spend money, they actually transfer money to others. The “other” now either deposits money in the bank or spends money. In the end, all of this $20 billion will be deposited in the bank. As a result, the bank balance has increased by $20 billion. If the reserve ratio is 20%, then the bank needs to retain $4 billion. The other $16 billion they can lend. What happens to bank loans of $16 billion? Ok, it is either put back in the bank or it is spent. But as before, in the end, the money must be recovered back to the bank. As a result, the bank balance has increased by another $16 billion. With a reserve ratio of 20%, banks must maintain $3.2 billion (20% of $16 billion). This left a loan balance of $12.8 billion. Please note that $12.8 billion is 80% of $16 billion and $16 billion is 80% of $20 billion. In the first phase of the cycle, banks can lend 80% of the $20 billion. In the second phase of the cycle, banks can lend $20 billion to 80% of 80%, and so on.