When the price of a foreign currency falls, the supply of that foreign currency also falls. Explain why?
The supply of foreign currency is directly related to the price of foreign exchange.
When the price of a foreign currency falls, it leads to cheaper imports and costlier exports.
The exporters are discouraged due to costlier exports. This results lesser inflow or supply of foreign currency in the economy. As shown in the diagram, the quantity of foreign exchange rises to OQ_2 from OQ_1 due to rise in exchange rate from OR_1 to OR_2.