What is XSL template? What output this XSL template will produce given a particular xml file?

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This kind of XSL transformation questions are more popular to gauge real understanding of templates. they can write template in front of you and may ask you to explain, most simple example of this is writing Identity template as discussed in XSLT interview question
Alternatively they may give you XSL and XML file and ask you about about of transformation. This are tricky questions in XSL and in order to answer these question you need to be familiar with XSL language, which is the primary reason people ask it. On the other hand this is an excellent opportunity to show you how well you know about XSL working or how template executes, by clearly explaining what a particular template does.
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