Let's do a simple test first. Take a big balloon1 and a small apple and put them together. Which is bigger? The balloon, of course. Now, put the apple in front of your eyes and put the balloon as faraway as possible. Now look again. Why, the bal-loon has become smaller! Things far away always appear smaller than their actual2 size. Don't the cars and houses far away look small?
Actually, every star in the sky is much bigger than the moon. But because they are farther3 away from us the stars look smaller than the moon.