What is the effect of capital goods investment decisions on intertemporal resource allocation?

• A. They shift resources toward consumption now
• B. They shift resources toward capital formation now to raise future output, potentially reducing present consumption
• C. They have no effect
• D. They reduce future output

Answer: (B)

Investing in capital goods changes how resources are used over time by prioritizing growth today to lift production tomorrow. When firms allocate resources to capital formation—machinery, factories, infrastructure—they devote current resources away from immediate consumption or near-term production to build future productive capacity. This leads to higher future output and incomes, even though present consumption may fall in the short run as resources are tied up in capital rather than consumed. So the best answer captures that shift toward capital formation now to raise future output, with the trade-off of potentially reduced current consumption. The other ideas miss this intertemporal trade-off or misstate the impact on future output.