FIGURE 12-8: Expected Deflation in the IS–LM Model An expected deflation (a negative value of Eπ) raises the real interest rate for any given nominal interest rate, and this depresses investment spending. The reduction in investment shifts the IS curve downward. The level of income falls from Y₁ to Y₂. The nominal interest rate falls from i₁ to i₂, and the real interest rate rises from r₁ to r₂.