1) you are tracking away from the VOR, therefore have 000 at the top, with the needle centered and the From flag. It would be incorrect if it were tracking 000, with 180 on the VOR and a FROM flag, as you would be going to the VOR and indications would be in reverse sense.
but in this case the VOR will be south of you, whereas the question says its situated to your east.
2) the error decreases with range. If you are over the station at 6000' (1nm) the DME will read 1nm, even though you are at the station. At 50 miles, at 6000', the error will be far less.
Yes thats why posted the question. It says
accuracy decreases with increase in range.