I think you are understanding it more or less correctly. Only a few details that you've missed
When you do a GRAPHIC 2,1, the 2 is for setting a standard bitmap with split screen and the one is for clearing the screen. The color memory is cleared at the same time. But what does "cleared" mean in this situation? The bitmap data is cleared, i.e filled with zeroes. The colordata are also cleared but the computer has to know what a "cleared" color is supposed to be.
And that's decided by the previously issued COLOR command. If no COLOR command has been issued the clearing of the color memory uses the default colors of the C128 screen which is a grey background (or dark grey, as opposed to medium grey and light grey which also exist) with light green characters.
The color information at 7168 ($1C00) is stored like this; the first 4 bits of each byte contains the foreground color of each pixel and the last 4 bits contains the background color. So, if no COLOR command has been issued, the color memory is being cleared with the value 219 ($DB). In binary this is 11011011. So the foreground will be set to 1101 (13) and the background to 1011 (11). 13 and 11 are light green and dark grey respectively.Mapping the C128
is one of the greatest books for the C128 ever. It explains all this in detail. Have a look at page 345, there are the bitmap modes described. (Note that the pagenumbers in the original scan of the book doesn't correspond to the pages in the pdf-file).