Well, the firs sentence is a question, so the first person is mostly asking about the size, not fashion ( like in suits you? ) so queda ( from spanish verb "quedar" that in many other cases will means "to stay" ) will mean fit so - Does that hat fits you? - Yes, it fits ok!

quedar bien (algo a alguien)= to fit/suit (sth to sb)

¨Queda¨ also means stay. Example: Quédate aquí = Stay here. It can also mean is (located). Example: ¿Dónde queda Puerto Rico? = Where is (located) Puerto Rico? Puerto Rico queda en el Caribe. = Puerto Rico is (located) in the Caribbean.

Does the hat "fits"/"suits" you? Yes, it does [fit/suit me]

Fits it OK? Yes.It fits O.K.