My son and I just had a nearly identical experience. We do not use "cutsie" words in our house, like you, and his answer to a tiny wug was "wug" as well. I actually had to think about it to interpret what was expected with that one.
It has always amazed me how quickly he learns a new language skill. In the past month, we began calling attention to the hard "c" and "g" sounds, which he was not pronouncing, and he concentrated on making those sounds and within a month is using them approximately 90% of the time. His ability to learn new words is astonishing - he has to hear most only once. He learned the word "hate" and started saying "I hate (mushrooms, for example)". I taught him "detest" and "loath" and he'll substitute them willingly.
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