Option 1 -> When income decreases, people buy fewer imports, reducing demand for foreign exchange, causing a leftward shift.
Option 2 -> This would occur with an increase in income, leading to more imports and higher foreign exchange demand.
Option 3 -> Decreased foreign exchange demand typically leads to domestic currency appreciation, not depreciation.
Option 4 -> With lower demand for foreign currency, it tends to depreciate, not appreciate.
Hence, Option 1: Leftward shift in the demand curve of foreign exchange -> When a country's income falls, consumers and businesses have less purchasing power, leading to reduced demand for imported goods and services. Since foreign exchange is needed to pay for imports, the demand for foreign currency decreases. This reduction in demand is represented graphically as a leftward (inward) shift of the demand curve for foreign exchange. This shift indicates that at any given exchange rate, less foreign currency is demanded than before -> correct