Since I haven't read the novel, I would say the general purpose of telling dreams is to share your vision or special event that happened in your imagination. The ability to remember dreams is really good, because most people will forget. While you can tell dreams, try see if you can still visualise the dream. Some dreams can be in black and white, and some can be in colour. Dreams have no limit, they take you to your own little world.
The correct answer would be option C: "feels slightly foolish about the events that occur", this due to the way the excerpt is written, since, it seems the author wanted to let the readers know that the narrator isn't stupid, so that they keep that in mind, when they read about a foolish thing said narrator did. If the narrator did something dumb, then option A and B would be discarded, as would option D.
Alrighty, so, you're currently trapped inside a cottage with a witch who wants to eat you and your brother. What do you do to escape? Do you beat the witch with her own broom and make a run for it? Do you push her into the oven (This is what happens in the story) and lock her in so that she burns up, then you and Hansel make a great escape? What do you do? (:
True, you want them to understand you as easily as possible and they will not know slang, etc. if they speak little english