Ambiguity in 'it'

IMO A

(A) how it is acquired, and how it is put to use (POE will help you to get to this answer, however, A maintains parallelism. it is not ambiguous in how it is acquired , because knowledge is the only logical referent of the pronoun it. Note that grammar cannot be acquired. The second it in how it is put to use is probably referring to knowledge as well because all the three questions are referring to knowledge, and questions are closely related)

(B) how is knowledge of grammar acquired, and how put to use ( awkward )

(C) how it was acquired and put to use (lack of parallelism)

(D) its acquisition and putting to use (lack of parallelism)

(E) how its knowledge is acquired, and how it is put to use (referent of its is not clear)

One massive problem with E here is that it creates an illogical meaning. With "its knowledge", what does "it" refer back to? Grammar - and can grammar possess knowledge?

In the non-underlined portion "of grammar" is a modifier for "knowledge", so "it" in the rest of the sentence refers back to "knowledge (of grammar)".

It's akin to saying "I've always been fascinated with the Statue of Liberty and I hope to see it on my next trip to New York". "it" here refers to "statue"...(of Liberty).

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Now, this sentence gives you a massive clue as to what it's testing by calling out "three questions" and then starting a list. That begs for two things - parallelism and "questions". Each portion needs to be a complete thought in order to constitute a question in parallel to the fixed first question, so each needs its own subject, and "its" does the trick.