How would you characterize the story's level of diction? Is this level appropriate for a story about a young boy's experiences?

The level of diction is very obviously high. There are many words and references which might be difficult for some readers to understand. For example:

Among these I found a few paper-covered books, the pages of which were curled and damp: The Abbot, by Walter Scott, The Devout Communicant and The Memoirs of Vidocq. 

It is obvious, however, that the narrator is not a young boy but an educated and sophisticated older man writing about...

The level of diction is very obviously high. There are many words and references which might be difficult for some readers to understand. For example:

Among these I found a few paper-covered books, the pages of which were curled and damp: The Abbot, by Walter Scott, The Devout Communicant and The Memoirs of Vidocq. 

It is obvious, however, that the narrator is not a young boy but an educated and sophisticated older man writing about an event from his childhood. He is able to describe feelings the boy could never have put into words himself. And, as a matter of fact, the boy would never have confessed his feelings to anyone at the time. It is the choice diction that makes the story worth reading. After all, it is an extremely simple story about a cheap trinket. James Joyce makes this little memoir take on much larger proportions.

We have all experienced young love and know how foolish and all-important, how painful and pleasurable it can be. James Joyce must be writing from his own experience, The diction gives dignity to the emotions the young boy was experiencing. For example:

These noises converged in a single sensation of life for me: I imagined that I bore my chalice safely through a throng of foes. Her name sprang to my lips at moments in strange prayers and praises which I myself did not understand. My eyes were often full of tears (I could not tell why) and at times a flood from my heart seemed to pour itself out into my bosom. 

But my body was like a harp and her words and gestures were like fingers running upon the wires.

The young protagonist could have have expressed his feelings in such terms at the time, but he is able to do so now. We never forget these things. We understand that a long time has elapsed since the event the author is writing about. He might not even recognize Mangan's sister if he were to run into her after all these years. She would be married and have several children. But he can actually relive the feelings he had for this pretty Irish girl whose unaffected femininity enchants him.

Her dress swung as she moved her body and the soft rope of her hair tossed from side to side.

The author's choice of diction is perfect for his story, not only because of the importance of the event and his subsequent disillusionment, but because of the indelible nature of his memories. He is not seeking to rid himself of memories by writing about them, as creative writers often do, but he is seeking to recapture and savor them, not unlike the great French novelist Marcel Proust in his masterpiece À la recherche du temps perdu (Remembrance of Things Past).