
Look at the horizontal and vertical gaps between the two circle centers directly, without setting up a full coordinate grid.
Numerically, $7-4\sqrt2 \approx 7 - 5.657 = 1.343$ cm, a sensible radius that is bigger than $r_1=1$ cm, matching the figure where $C_2$ is clearly the bigger circle, and smaller than the square itself.
Let's summarize:
So $r_2 = 7 - 4\sqrt2$ cm, which is option (C).