Final answer:
A fixed exchange rate regime is exemplified by a central bank intervening in the foreign exchange market to buy domestic currency when its demand falls, using reserves to maintain the exchange rate.
Step-by-step explanation:
The situation that describes a fixed exchange rate regime is when falling demand for the domestic currency prompts the central bank to buy the currency. Under a fixed exchange rate system, central banks intervene in the foreign exchange market to maintain the currency's value against a benchmark currency or a basket of currencies. These market interventions often involve using reserves to correct any devaluation or appreciation of the currency. In contrast, in a floating exchange rate regime, the currency's value is determined by the market forces of supply and demand without direct government or central bank intervention.
Government policies can affect the exchange rate by influencing the economy's supply of money or interest rates. A contractionary monetary policy that drives up domestic interest rates would generally cause the currency to appreciate, not fall, which does not align with a fixed exchange rate regime.
The fixed exchange rate regime is established to help stabilize a country's currency and provide a predictable environment for international trade and investment by limiting the fluctuations in currency values.