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Posting
"What does MTU do..is it used to fragment packects on WAN links or it's used to accept incoming MTU packets?"
MTU defines the maximum physical size the interface can handle. On input, it will drop packets too large. On output, it will either drop the packet, if IP packet indicates don't fragment, or fragment the packet and send it. For the latter, packets will be fragmented to maximum size. Last fragmented packet will have whatever is left over.
"If my carrier can take more than 1500Kb frames and the router generates a frame bigger than 1500Kb[ say by use of GRE] and if the router interface has MTU set to 1500 then what will happen?"
As described, above.
"Will router send out a frame bigger than 1500kb or the statement on interface will cause fragmentation?"
As described, above.
PS:
To take advantage that a carrier supports > 1500 for a GRE tunnel, your interface (or whole device) would also need to support the larger packet to avoid drops or fragments of 1500 byte packets with the added GRE overhead.
