Allows users to embed posts into other posts with a TinyMCE button
Yes, by default you can embed posts and pages. Go to Embed Post Options under the Settings tab of the admin menu to enable/disable other post types.
Nothing, if you embed a post within itself, the plugin will simply render the normal content.
Yes, for example Post 1 can embed Post 2 which embeds Post 3 which embeds Post 4.
If one post embeds another which embeds the first post, the first post will be rendered with the contents of the second post embeded, without embeding the first post.