A deposit does not sit still. The bank keeps a fraction as reserves and lends the rest, and each loan is deposited again — round after shrinking round.
Credit creation is a simple model of how lending can multiply the money in an economy. A bank takes in a deposit, keeps a fraction back as reserves, and lends the rest. The borrower spends the loan, and whoever receives that money deposits it again. One more round begins, and the loop repeats.
The diagram shows this as a staircase of shrinking bars. The first bar is the deposit; each later bar is the amount that survives as a new loan after a fraction is reserved. The heights fall away in a fixed pattern, which is the whole idea behind the money multiplier.
Because the shrinking is the point. If every round kept the same size, lending would never stop. It is the fact that each round is a fixed fraction of the one before that makes the total settle at a limit, and a shrinking staircase shows that at a glance.
The process starts with a deposit. Someone places an amount in the bank, and that amount becomes the base from which everything else in the model is built.
The bank does not lend out everything. A set fraction is held back as reserves so that customers can withdraw their money. This fraction is the leak that slows the process down.
The part not held as reserves leaves the bank as a new loan. That loan is new spending power, and in the model it is the money created by the act of lending.
Whoever borrows the money spends it. The person or firm paid with it then deposits that amount at a bank again, so the same process can start once more — with a slightly smaller amount.
Because each round is a fixed fraction of the last, the rounds form a shrinking series. Adding them up, the money in the economy grows towards a limit rather than growing without end.
When a bank makes a loan, it credits the borrower with money it did not hold before. That new money is created by the act of lending, and it is later balanced when the loan is repaid.
Reserves are a fraction of deposits kept back so that customers can withdraw their money. In this simplified model the reserve fraction is what limits how much of each deposit can be lent on.
It is the idea that one deposit can support several rounds of lending. Each round is a fixed fraction of the one before, so the total extra money is a multiple of the first deposit rather than endless.
Because every bank keeps part of each deposit back. The part that is lent is smaller than what came in, so each new round is a fraction of the previous one and the amounts shrink towards zero.
Only as a rough teaching model. Real banking has many more rules, capital requirements and behaviours. This model strips all of that away to show the single idea of how lending can multiply a deposit.