From http://www.google.com/intl/en_uk/mobile/android/market-policies.html ,
Product Removals: From time to time, Google may discover a Product on
the Market that violates the Android Market Developer Distribution
Agreement or other legal agreements, laws, regulations or policies. In
such an instance, Google retains the right to remove those
applications from your Device remotely, at its sole discretion. If
that occurs, Google will make reasonable efforts to recover the
purchase price of the Product, if any, from the originating Developer
on your behalf. If Google is unable to recover the full amount of the
purchase price, it will divide any recovered amounts between the
affected users on a pro rata basis.
From what I can gather from above, it seems that
- The app in question will be removed from your device and you will be entitled for a refund. (not strictly a full refund sometimes)
- The app fails to be removed from the device and you may not get a refund. (Though I suggest you can contact google in this case)
- If the app exists on your device, you can use it any how and it is not under jurisdiction of google anymore.
And answer to you alternate situation, again, yes Google will make reasonable efforts to recover the purchase price of Product and the refund option will probably work.