So a couple of things first. I have noticed that my fargo moves when I have not played, which tells me there is some feedback based on my opponents future ratings change [performance]. Small but still present. My answer is based on what I think it should do.
So my final answer is D. This is what should happen in my opinion. No way either C or A are the answer. B shouldn't happen either.
Your intuition is right here. If Bill apparently seriously underperforms (375 instead of expected 575) when he moves to Phoenix, there is every reason to believe all those who play near Bill's speed back in Nowhereville also would perform near 375 if they played in Phoenix. And when those players move down to 375, everyone else in Nowhereville needs to move down a few hundred points to maintain the internal order. This is an extreme (fake) case of the kind of rebalancing that is happening on smaller scales every day.
Also, if we look at another person in Nowhereville, perhaps Vito, rated 630, he will have went to bed rated 630 and woke up to see 430, even though he didn't play anything new. It's not that his opponents got worse. It's that FargoRate got less confused about how they actually play. When your rating fluctuates, it's about FargoRate having a better understanding of your average opponent strength.
As for ELO, I have a USCF rating but have no specific knowledge of how it works. Very crude understanding at best.
Elo is step by step, without this feedback we're talking about here. With Elo, Bill would go down a bunch from his performance in Phoenix, but his friends back home stay where they are. If Bill moved back to Nowhereville, the effects of his Phoenix trip would in time trickle around and cause the whole town to go down by about 7 points (not the 200 right away like with FargoRate).
