"Where do the Italians live?"
Translation:Kie loĝas la italoj?
Because adverbs such as "kie" take an accusative marker only when they indicate motion.
Kie vi saltas? = Where do you jump? Where are you jumping? Kien vi saltas? = Where are you jumping to?
So "Kien loĝas" would be something like "Where are the Italians living to?", but "living, staying" is by definition in one place and not from one place to another.
Yes, but that form seems to be used by a lot of people. If you do searches on google with "franculoj", "italuloj", "germanuloj" google brings up results to pages that really contain those words meant to mean frenchmen, italians and germans. Even "usonanuloj" exists.
Of course this doesn't mean that that usage is certainly valid, as sometimes so many people use some words wrongly that the line between right and wrong becomes somewhat invisible. This phenomenon happens in national languages too. So I can't personally say that it is definitely wrong or right, but my personal opinion is that "italuloj" doesn't bring to mind the meanings that you suggested, but rather italian people.