Yes, but you need to make sure the "save user settings," or whatever is also checked right below archive and install. I think it is by default, but make sure.
Yes, all your music, settings, etc. will be there, if you do this.
I forgot to say, what's the difference between Upgrade Mac OSX and Archive and Install. Pros and cons of both of them. Sorry, I'm not a genius when it comes to the Upgrading dept.