Let's say there's a big bear market and everyone is selling their Tethers on an exchange like Bitfinex. I understand it is pegged to the dollar, but what happens if the price of Tether goes too high or too low above/below $1? Is there some mechanism that corrects the situation?
that depends on the demand in the exchange site and you can see the rates in various exchange sites are different, and when the price of tether goes too high or too low and nothing happens. But the holders will be got less and more money based on the price of tether.