Learn Russian: Как дела? Я хорошо отдыхаю.

Как дела? is a set phrase that literally means "How are things?" or "How is business?" Как means "how" and дела is the plural of дело (business, affair, matter). It is the most common casual way to ask how someone is doing.

Why use хорошо here instead of a regular adjective for "good"?

Because it is describing how an action is being done (resting), so we need the adverb form ("well"), which is хорошо. You would use an adjective to describe a noun, such as a "good day" or "good book."

How do we know отдыхаю means "am resting" rather than just "rest"?

Russian does not have a separate continuous tense like "am doing" in English. The present tense verb отдыхаю translates to both "I rest" and "I am resting." You can tell from the conversation that it is happening right now.

Can I change the word order and say Я отдыхаю хорошо?

Yes, you can. Russian word order is very flexible. Putting the adverb хорошо before the verb отдыхаю is just a very natural and common way to phrase it, but both orders are perfectly correct and mean the same thing.