We did the stopover in 2015 and it worked great. We have been back two more times as we just fell in love with the country!
There is plenty to do, more than you will have time for even if you did 7 days, so no worries on that:)
On that first trip, we had 3 days. It went by too fast! We did a one day tour of the Golden Circle and spent the rest of the time in Reykjavik.
On our second trip, last summer, we rented a car and did the ring road for 12 days. Then our last trip was just last month and we had 6 days. Since that was winter, we rented a car for just one day when the weather was good, and then did a tour another day and then spent the rest of the time in town. We are already planning our 4th and 5th trips.
Right in Reykjavik we have done the Citywalk "free" walking tour, a food tour, Flyover Iceland (felt it was overrated though), wandered many side streets looking at the beautiful murals, shopped and just wandered, visited Harpa, checked out the Sun Voyager, went to Sundhollin a local pool, and then went to Sky Lagoon which is only about 15 minutes from downtown. We did a lot of walking, and really enjoyed wandering down along the wharf.
I do not remember how much time we had on our return layover on that first trip, but we made our flight without rushing. The airport is not very big, so it is very easy to navigate.