Yeah, that game sounds exactly like GORILLA.BAS, which was distributed with QBasic. It would have actually been somewhat difficult to implement in BASIC on the C64, as much of the graphics functionality of the C64 was only accessible from BASIC using PEEK/POKE.
Yes that's it. The details are hazy and now that you mention it I think they might have been only two characters. I just remember spending hours fooling around see what I could change and then rerunning the game.
Sort of. They can be longer, but C64 basic ignores anything past the first two. So e.g explosive and expensive would be treated as the same identifier.