1) The thumbnail cache is where your device stores the small thumbnails that appear next to picture file names in lists. It won't affect your actual photos in any way, however your phone will then need to re-populate the cache again next time you go in a folder that contains photos. It's best used if you have a large number of photos on your phone, a number of which whose locations you only access very rarely/never at all.
2) It stops background processes from running, just like on a computer. The apps will still be there, they'll just be stopped from doing anything they're doing in the background, for example an anti-virus scan.