Final answer:
Lifestyle creep is the increase in spending on luxury items as income rises, opposite to what is suggested in the question. It leads to a higher standard of living but can hinder savings. When income decreases, consumers buy less normal goods and potentially more inferior goods, representing a negative income effect.
Step-by-step explanation:
Lifestyle creep refers to the phenomenon where an individual's spending on goods and services increases as their income increases. This is opposite to the statement provided, which incorrectly suggests that buying expensive goods and services decreases with higher income. In fact, lifestyle creep implies that as people earn more, they start to spend more on luxury items, non-essential amenities, indulgences, and higher-end products, often without realizing it. Their standard of living improves as they afford more expensive lifestyles, but it can also lead to insufficient savings and less financial security overall.
Referring to the negative income effect, when there's a decrease in income, such as a parent's check failing to arrive, the consumer's budget constraint shifts inward, and they are forced to reduce spending. This situation corresponds to a decrease in the purchase of normal goods — products for which demand increases when income increases and decreases when income decreases.
On the other hand, consumers may purchase more of what are known as 'inferior goods' when their income decreases. These are goods for which demand increases as income falls, and falls as income rises. An example is opting for generic brand groceries instead of name brand ones when trying to save money. Conversely, as incomes rise, consumers often shift towards purchasing more normal goods and fewer inferior goods, indicating a shift in the demand curve to the right for normal goods and to the left for inferior goods.