Suppose (it's an example) GDP= $1 000 000, Marginal Propencity to Consume(MPC)=0.25, that borrowing money is an absolute taboo for our government and that said government wants to increase GDP.
What can the government do to increase GDP of its country? Well, it can increase government spendings. The expenditures multiplier is equal to 1.33, meaning that for each \$1 spent by the government the GDP increases by \$1.33. But with borrowing out of question our government will have to tax population first in order to raise the money. But additonal taxation will decrease our GDP. Will our expenditure multiplier be big enough to compensate for effects of our tax multiplier? Yes, because the absolute value of the tax multiplier will always be less than the absolute value of expenditure multiplier, no matter what MPC we will have (except if we will have MPC=1, but in this case we will get divizion by zero error), consequently meaning that EM-TM always >0. In our particular example we will lower GDP by 0.33 for each dollar that we taxed, but at the same time increase by 1.33 for each dollar that we spent, meaning that taxation and consequent spending of N dollars will give us +N dollars to GDP, 1.33x-0.33=x(1.33-0.33)=x*1=x
1.Is my understanding of given model correct?
2.If it's correct, then why don't government tax and spend tax money much much more actively than they are doing today? It looks like it would be a "cheat code" for unlimited exponential growth. Maybe there are other factors that prevent it, but that our simple model ignores?