So for instance would 1Tb be the equivalent of double the speed of 500Gb?
Your HDD space is like your hashrate, so as much as you're willing to use.
Exactly.
Will the miner be able to use USB connected HDD?
USB3 ones are fine, I've tried them on the testnet. I'm guessing USB2 might not have a high enough transfer speed, but I haven't testing one.