The people of the ancient Near East believed that the Earth’s dry land

Dear srinjoy28 and gmatter0913,
To be honest, this question has gone through several revisions internally, making the differences much more clear between right and wrong answers. I am no longer super-happy about the version that is posted here.

Technically, the issue is sequence of tenses, which governs tense rules in indirect speech. You can read the rules here.
https://magoosh.com/gmat/2013/sequence-o ... orrection/

The difference between (D) and (E) in this version is too slight and nit-picky to be a good GMAT question. Here's version (D)
The people of the ancient Near East believed that the Earth’s dry land first had appeared when the Creator had separated the “water above” from the “water below”, and that there was another ocean in the sky, above the firmament.
The people with these beliefs are in the past, which is why "believed" is in the past tense. Anything that was a past event from their perspective should be in the past perfect in indirect speech. Both "appeared" and "separated" are in the past of the people who had these beliefs; therefore, both these verbs should be in the past perfect tense.
By contrast, the existence of the second ocean, above the firmament, would have been a present event for the folks who had these beliefs. In other words, if we went back in a time machine and interviewed them, they would say, "God separated the waters and dry land appeared a long time ago, but right now, as we speak, there's another ocean up there above the firmament." Anything that is present tense for the people who held those beliefs must be in the simple past tense in indirect speech. That's why there's a tense difference between the first two verbs and the last.

You see, the funny thing is --- if multiple events happen at different times, but all in the past for the speaker or for the person who held the beliefs, then all of those events at different times, have the same tense: past perfect. This much is the same as any ordinary use of past perfect --- if there is a series of past events, and we are comparing all the earlier ones to the most recent, then the most recent is in the past, and all those previous events at different times are lumped into the past perfect.
By the time Michelangelo painted the Last Judgement, he has already done X, had carved Y, and had painted Z.
Those events, X, Y, and Z might be separated by decades, but they are all in the past with respect to the main focus, the Last Judgement.

Furthermore, the action of "separating" and the action of "appearing" --- did they really happen at different times? or were they, for all intents and purposes, simultaneous? Did dry land appear the moment that the waters were separated?? Of course, for this, we would have to have a detailed understanding of the philosophical worldview involved. I point out, though, it's at least possible that these two are simultaneous, which is another good reason for them to have the same tense as each other.

So, those are technical reasons why (D) is better than (E), though once again, we have revised this question a few times, and I am no longer happy to this earlier unrevised version.

Mike