#1- The smaller size suggested is to avoid having the extra bulk of the fusible in the seams.
I've never found it to be a problem (I press the seams open), but I don't know how thick/stiff "Stacey" interfacing it. Never heard of it. But if it is an issue, as long as you do Step#2 correctly, cutting the smaller size will be fine.
But I suggest pressing those seams open.
#2 - The muslin (?) is to prevent the fusible from getting on your iron, and also in case the T-Shirt has motifs that can be distorted/melted if the iron touches it directly. I use an applique pressing sheet, but I if you don't have one, muslin can do the trick.
Don't know the reason for wetting the muslin. I wouldn't. I would put the T-shirt square face down, then the interfacing fusible side down and then, using muslin/applique sheet, PRESS, not iron (according to whatever directions came with the interfacing).
Let it cool to make sure you've got a good bond. If not, press some more.
It's a very forgiving type of quilt.
And your granddaughter is going to love it!