A village is generally considered to be smaller than a town.
"En bygd" is just a scattering of houses, usually connected to farming activity, and will have no defined town centre with a main street. One of the things that defines it is its lack of urban features.
The translations we've chosen to accept for this is "village", "hamlet", and "small town".
The previous exercise (for me) was "Jeg bor i nærheten", and I answered "I live in this area", which was marked wrong. The correct answer was "I live nearby". But in this exercise, the translation is "in this area". So it seems that the addition of the word "her" makes it "in this area"...? (That's the only difference I can see). That is, "i nærheten" is "nearby", while "her i nærheten" is "in this area". Am I right, or is something else going on here?
The word "her" is left out of the translation, i.e. it seems that you could also say in English "The village is here in this area". Could I also leave it out of the Norwegian? Could I say "Bygda ligger i nærheten"? Or is there something in the Norwegian that requires the use of "her"? (Like maybe "her i nærheten" is a fixed expression).