Honestly your first question is a hard question to answer. I haven’t been in academia in a long time for one thing, and for another “difficulty level” of an exam is something that’s hard to objectively quantify.

Q.1 What is meaning of "spatially confined"?

A.1. Meaning that there is a potential boundary that restricts where a particle may be physically located in space. A free particle can be anywhere without restriction as long as it has sufficient potential energy. A classic example of a confined particle is a particle-in-a-box. In this case the particle is defined as being confined to a box because the potential energy at the box walls is infinite. Therefore, it is impossible for the particle to be located beyond the box walls. It is this confinement that results in quantization of many observables, including the particle’s energy. Essentially, confinement is the basis of much of quantum mechanics. Note that the confinement to a potential boundary is not absolute in most real systems due to the phenomenon of tunneling. This is because the potential boundary isn’t infinite.

Q.2 How is this possible to measure an electron's momentum without confining it? You have to confine it in the instrument. I can understand, If the size of the apparatus is big enough we assume that it's infinitely bigger as compared to the size for which quantum effects are predominant. But still it's an assumption, in reality, it has some finite confinement.

A2. I guess if you want to be pedantic, every particle must be ultimately be confined if we accept that the universe is not infinite in size and the particle must be in the universe. We are all in a box!

I mean, let’s consider a (hypothetical) free particle, which is unbound and can be anywhere (for the sake of argument, let’s assume the particle can truly be anywhere, universe boundaries be damned). The Heisenberg principle does still hold.

[tex] \Delta x \Delta p \geq \frac {\hbar}{2}[/tex]

Since ΔX for an unbound (not confined) particle approaches infinity, then ΔP may approach zero and still satisfy the uncertainty principle. You can be annoying and say, well, the particle HAS to be in the universe, therefore it is confined, therefore the uncertainty in momentum can’t, strictly speaking, ever equal zero. I’ll grant you that, but what’s the practical point at which the uncertainty is basically zero? If you are feeling industrious, you can start with a particle-in-a-box model and look at how the variances of position and momentum behave as the box length is increased to infinity. If you are REALLY industrious you can put in actual box lengths and make a guess as what the practical limit is for when a particle essentially becomes "unbound" and the uncertainty in momentum and energy level differences become practically meaningless. I would guess, for an electron, it is somewhere above 1 nm but far below 1 micron. This is, probably not coincidentally, where the "nano" properties of small particles begin to become significant. E.g., quantum dots become "quantumish" at around 8-9 nm or so. This is when electron confinement starts to manifest itself.

Q.3 Can you please shed some light on the historical aspect of observer effect? And how people used to think that it's a consequence of Heisenberg's uncertainty principle.

A. 3. You can find some answers to this by sleuthing around the internet. I guess the confusion lies in the fact that both give rise to a measurement uncertainty at quantum space scales, but whereas one is a practical effect of the act of measurement, the other is a fundamental limitation of measurement independent of the actual act of measuring. Apparently, Heisenberg himself got it wrong and mistook the one for the other, because some of his original thought experiments referred to the observer effect and not the principle that would eventually bear his name. Other common quantum mechanical thought experiments, such as Schrodinger’s Cat, allude to uncertainty in measurement at quantum scales, but refer to observer effects and not the Uncertainty Principle. I imagine this is at the root of a lot of confusion, particularly those who have a laymen’s familiarity with the bizarreness of the quantum mechanics through popular literature and whatnot but haven’t taken any actual rigorous coursework. It wouldn’t be a stretch to think that test writers can make errors along these lines. I guess that’s the challenge of writing tests on subjects that still to this day aren’t fully understood. Didn’t Richard Feynman say something to the effect that anyone who says they understand quantum mechanics doesn’t understand quantum mechanics?

Maybe you find these links interesting:

https://en.wikipedia.org/wiki/Uncertainty_principlehttp://factmyth.com/factoids/observing-a-phenomenon-affects-its-outcome/