Why would the author frame this tale as a story within a story? In other words, why have a narrator listen to Grandma tell the tale, instead of having Grandma tell the tale herself?

It allows the reader to see Grandma as the narrator sees her. This allows us to question the accuracy of Grandma s tale, but also to feel the trust of the narrator.
It allows the reader to hear the story from all eras. If Grandma was telling the story directly, it would be harder to jump through time.
It allows the reader to feel the same doubt and surprise that the narrator does when first hearing the story. If Grandma was just telling it, it might not feel as shocking.

B doesnt work because having a narrator who is part of the story is not objective. Additionally, the narrator keeps reminding us of all the good Catlin supposedly did--not grandma.