I have trouble understanding how the op amp settles on the Vdiff = 0.0002V

In order the produce this Vout must be 1.9996V and therefore V- will be the 0.9998V like you said

However if the output is now** 2V as required**, surely this will in turn affect the V- voltage and make it 1V thus producing 0V output!

What means "as required"?

To answer your question, we must avoid any simplifications, which means:

If the feedback factor is exactly 0.5 and the open-loop gain 1E4 the output

__cannot__ reach Vout=2V.

The exact gain formula gives us

**Vout=Vin*[1E4/(1+0.5E4)]=1.9996001 V. **
Therefore:

** V-=0.99980004V and Vdiff= Vin- V- =0.00019996.**
This is a stable equilibrium because:

**V-*1E4=1.9996001.**
__As a result__: The output has a value which exactly produces a differential voltage that perfectly fits to this output voltage when multiplied by 1E4.

Any larger/smaller output voltage causes a small reduction/increase for Vdiff thereby correcting this deviation from the equilibrium. OK?