Does המשטרה mean police as an institution or police as a policeman/policewoman or both?
Singular should be accepted. It's a natural sentence in English, just like you say "my family is visiting" when it's understood that a family is made up of multiple people. I'm here to learn Hebrew, which is hard enough without insisting on stupid technicalities in English.
In English, "the police" can refer to a group of policemen (plural) or to the police force (singular). "The police aren't arresting us" and "the police isn't arresting us" are both correct English, albeit with slightly different connotations.
Meanwhile, doesn't עוצר mean "stop" as well as "arrest"? Shouldn't "the police isn't/aren't stopping us" be accepted? That could either mean that the police prevent us from doing what we wanted, or that they momentarily detain us but eventually decide not to arrest us and let us go.
Yes. In other exercises for this lesson, עוצר for "stop" is completely interchangeable with "arrest."
if המשטרה is a unit, why can we not use "is" here? In hebrew the verb clearly defines it as singular, עוצרת.
How to know when it means to stop and when to arrest?
E.g. If someone tells you that he was driving and then the police עוצר אותו . Does that mean they jjst stopped his car, or did they actually arrest him and took him to prison or something? How wo you differentiate these two?