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if you are not seeing paypal as an option, it may mean that paypal is not an option in your region
https://prnt.sc/12uumz6
You can still buy games with PayPal, but there are exceptions where you would need to add money to your wallet (E.G. marketplace purchase). It's always been this way, it hasn't changed.
also, if you do a refund and steam is unable to refund to your 3rd party payment, the money goes to the wallet automatically
Have you tried adding a random game to your basket, checking out and then seeing whether or not PayPal is an option for a payment method?
Yes, for in-game currency or items in an item-store (E.G. Rust), you need to add money to your steam wallet balance. I don't know the reason, but i would assume this is since you are buying it off a publisher, rather than steam itself.