The exchange between MacDuff and Malcolm serves for Shakespeare to examine the difference between a tyrannical ruler and a noble/just ruler.  Malcolm presents many different terrible traits, many of which he compares with the tyranny that Macbeth has presented, in order to demonstrate what negative impact tyrannical rule has on a country.  However, for the purpose of the play Malcolm is truly just presenting this image of the tyrannical ruler to test MacDuff's loyalty to Scotland and ensure that he has not been sent by Macbeth to lure MacDuff into his demise.  When MacDuff hears the full extent to which Malcolm claims to be a tyrant, he acknowledges that Malcolm should not be allowed to rule if he is truly the tyrant he claims to be.  This shows incredible honesty and loyalty to Scotland because he is willing to openly tell Malcolm that he is not fit to rule if he is a tyrant like Macbeth.  This in turn buys Malcolm's trust and he enlists MacDuff's help in defeating Macbeth.  From a thematic perspective, Shakespeare uses this exchange to develop the message that tyrannical rule of any form cannot be best for a country and must be overthrown by a just and noble ruler who possesses many of the virtuous traits that MacDuff exemplifies.

What is Macduff's reaction to Macolm's vices?

In Scene 3 of Act IV of Macbeth, with treachery abounding in their kingdom, while Malcom and Macduff are in England, Malcolm dissembles in order to test Macduff's loyalties.  Malcolm, therefore, disparages himself, saying that he possesses many vices, and has committed many crimes.  In short, he says that is not worthy to be a king:

...I have no knowledge

Of the king-becoming graces,

As justice, verity, temperance, stableness

Bounty, perseverance, mercy, lowliness

Devotion, patience, courage, fortitude

I have no relish of them, but abound

In the division of each several crime,

Acting it many ways.  Nay had I power, i should

Pour the sweet milk of concord into hell,

Upon the universal peace, confound

All unity on earth. (4.3.103-112)

Having heard Malcolm's disparagement of himself, Macduff is emotionally devastated by his words, and patriotically bemoans the fate of Scotland under Macbeth.  Macduff recalls the goodness of Malcolm's parents in wonderment that Malcolm could be so corrupt:

                              ...O nation miserable

With an untitled tyrant bloody-scepter'd

When shalt thou see thy wholesome days again,

                                                 ...Thy royal father

Was a most sainted king....

These evils thou repeat'st upon thyself

Have banish'd me from Scotland.  O my breast

Thy hope ends here! (4.3.117-128)

Finally, realizing that Macduff is sincere in his loyalty and love for his country, Malcolm reveals that he has merely been testing Macduff in order to ascertain that he is not in favor of Macbeth's rule.  Therefore, Malcolm tells Macduff,

Now, we'll [fight]together and the chance of goodness

Be like our warranted quarrel....(4.3.151-152)

Together, Malcom and Macduff vow to destroy Macbeth and restore Scotland to its people.