Suppose in our two-period model of the economy

that the government, instead of borrowing

in the current period, runs a government loan

program. That is, loans are made to consumers

at the market real interest rate r, with the aggregate

quantity of loans made in the current

period denoted by L. Government loans are

financed by lump-sum taxes on consumers in

the current period, and we assume that government

spending is zero in the current and

future periods. In the future period, when the

government loans are repaid by consumers, the

government rebates this amount as lump-sum

transfers (negative taxes) to consumers.