I wonder if they really do mean to break when the answer hits the known value. If so that's kind of a pathetically useless thing to do. While I know most whiteboard coding problems aren't things you ever need to write in production code, the change to make it break when five decimal places stabilise is not much more difficult and provides an actual nontrivial output.
I'm sure it would be fine as a first pass but there's no way anyone would end it there. Two obvious immediate objections being that the point where it first rounds to the correct value does not imply the point where it stabilises there and the second being that you're using the value you're trying to calculate in calculating said value. At that point, a good interviewer leads them toward fixing these issues rather than just saying "wrong", of course, but I'm sure the end result is not to use pi in the algorithm.
Also, his next step down isn't really one jump down in difficulty; it's presented as "if you don't even know how to begin to approach that problem I need to make sure that you can code something trivial." That is to say, it's an arbitrary number of steps down that implies little about the initial question's intended difficulty.
