Eventually, I might answer this myself 🙂 The problem is only on my local drive (local host, Apache server). I uploaded the theme to my ISP and it works. Any ideas?
I did try resetting the permalinks as I have read here. Not sure exactly how to “reset” them, but I went into (as admin) settings, permalinks, and then set it to default. Is this what is suppose to be done when it says “reset permalinks”?