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It is the purpose of this paper to introduce the government budget restraint into a very simple theoretical static macroeconomic model of aggregate demand with a rigid price level, and to show how the analysis of macroeconomic policies is affected by the budget restraint.[1] To summarize: the results indicate that the multiplier effect of a change in government purchases cannot be defined until it is decided how to finance the purchases, and the value of the multiplier given by the generally. The work underlying this paper was done partly at the University of Essex and partly supported by a National Science Foundation grant to the John Hopkins University. I am indebted for helpful comments to G. C. Archibald, H. G. Johnson, J. Johnston, D. E. W. Laidler, R. A. Mundell, and F. G. Pyatt. 1 The government budget restraint has also been recognized by Patinkin (1956, pp. 361-65), Hansen (1958, chap. iii), Musgrave (1959, chap. xxii), and Enthoven (1960, pp. 303-59, esp. pp. 315 ff.), among others. After this paper was accepted for publication, two related pieces of work came to my attention: Ritter (1955-56) and Ott (1965). Both employ the idea of a government budget restraint, but neither carries the analysis as far as is done here accepted analysis (which ignores the government budget restraint) is in general incorrect. The one-year impact multiplier effect of government purchases may be greater or less than the value obtained by ignoring the budget restraint, depending on whether the method of financing is mainly by printing money or mainly by taxation. The same applies to the long-run multiplier effect of government purchases. A striking result is that the long-run multiplier effect of an increase in government purchases, with no change in tax rates, is equal to the inverse of the marginal tax rate