So once it's verified that you know a couple of semi-common words it won't ask you any more common words at all.
It looks like a reasonable idea to me and not stupid at all.
Being able to correctly define useful words would be a better test of knowledge. Just because you “know” some words doesn't mean you really understand what they mean.
Bah, it's just a test for “book smart” people to feel good about themselves. One has to feel good about that time investment, I guess.
On a side note, I don't think using too many uncommon words is a good thing. It just obscures the meaning of what you are trying to say unnecessarily. But this is a status marker and a pretty effective way to create tribal boundaries; people love to feel smart without too much effort.
That is a dumb assertion. By definition, ALL English words come up in written word, and it's hard to imagine a case where they don't come up in spoken word as well.