Definitely. I would have liked the test to be "would you be comfortable using this word in a sentence? (if you had to)" Even as a native speaker there are times when I know the definition of a word, but opt for a simpler word because I don't know all of the implications of using it.
Right, unless you want to ruin your point entirely by stopping to define words. Communication relies on shared vocabularies, not just one person's vocabulary.
There are plenty of words I know that I generally avoid in conversation for practical reasons. Entertainment reasons, though... I caught my wife teaching our not-yet-two-years-old daughter to use the word "etiolated" when referring to a green bean that was wilted and yellowish.
