40. Given goods market equilibrium in the diagram above, what happens to the level of output and income and the trade balance? 1. A depreciation of the exchange rate causes a decrease in exports and the level of output and income. This is indicated by a downward shift of demand for goods curve. The NX curve will shift to the left, and a trade deficit occurs. An appreciation of the exchange rate causes an increase in exports and the level of output and income. This is indicated by an upward shift of the demand for goods curve. There will be a downward movement along the NX curve, and a trade surplus occurs. An appreciation of the exchange rate causes a decrease in imports and the level of output and income. This is indicated by a downward shift of the demand for goods curve. There will be an upward movement along the NX curve, and a trade surplus occurs. A depreciation of the exchange rate causes an increase in exports and the level of output and income. This is indicated by an upward shift of the demand for goods curve. The NX curve will shift to the right, and there is an improvement in the trade balance