What happens to a Warlock’s expended Spell Slots when they gain a Level?

Suppose a Level 6 Warlock has expended both of their Level 3 Spell Slots. Then, upon receiving XP, they gain enough to level up to Level 7. They immediately gain access to their new spell (and their replacement spell if they so choose), but what happens to their spell slots?

  1. They now have 2 4th Level Spell slots, ready to be used, and their expended 3rd level spell slots vanish
  2. They now have 2 expended 4th Level Spell Slots, and they cannot be used until they take a Short Rest

Which is it?

If an Elf Wizard regains all expended spell slots after a 4 hour rest (trance), then what good is Arcane Recovery?

Does an Elf Wizard regain all expended spell slots after a 4 hour rest (trance)?

It would appear that the answer here is yes, however, if that is the case, then what good is Arcane Recovery? (I understand these are separate questions but the answer to one will affect the other)