What is the prevailing opinion on what API level apps should be developed to today? In other words, in Andriod SDK Manager, what packages should I have installed and what emulator configuration should I create to reach the majority of users and still have the latest functions avalable?
The referenced android.jar does not affect the supported device. You can compile with android.jar from Android 4.1 SDK (platform 16) and it will run fine on Android 1.6. Only when you use a feature not available in an older version then it will not be compatible.
This can only happen if you use a library that is not supported by the older version (in that case the library documentation must say that).