Your (1) is correct. $G = \langle G \rangle$ is always generated by its own elements. If $G$ is finite to begin with, this shows it is finitely generated.
So, (2) is moot. Fraleigh can conclude every abelian group of order 360 is finitely generated (at worst, by the set of its own elements).
In general, to say a group $G$ is generated by a subset $S$ of that group means that every element in $G$ can be written as a finite product of the elements in $S$ and their inverses. If $G$ has a finite subset $S$ with this property, it is said to be finitely generated. If there is no finite subset with this property, it is "not finitely generated" or "infinitely generated." Of course a group can also be finite or not finite. Your argument (1) shows that of the four hypothetical possibilities $\{\text{finitely generated or not}\} \times \{\text{finite or not}\}$, the possibility "finite but not finitely generated" can never occur. All three other possibilities do occur:
(a) Finite + finitely generated. As your argument (1) shows, any finite group is in this category. Note that the group usually has a generating set much smaller than itself. Generating it with all its elements is kind of a "last resort" to guarantee it's finitely generated. For example $S_n$ is generated by the transposition $(12)$ and the long cycle $(123\dots n)$.
(b) An infinite group can be finitely generated. For example $\mathbb{Z}$ (with respect to addition) is generated by $1$.
(c) But an infinite group can also fail to be finitely generated. For example $\mathbb{Q}$ (with respect to addition): any finite list of rational numbers has a least common denominator $d$; then the only numbers that can be written in terms of these (and their inverses) are multiples of $1/d$. So it is not possible to find a finite set of rational numbers that generates all rational numbers.