The MIT license only requires that the copyright notice and MIT license notice “shall be included”. I interpret this so that the notices must be discoverable and readable by an ordinary user. The MIT license has no further restrictions or requirements regarding distribution.
Does Software Z need to disclose it's inclusion of Y and X?
Yes, the software must include the copyright and license notices for Y and X.
Good places for these notices are a manual, or an “About this software” menu item in a GUI.
Software Z can be distributed under a proprietary license (given proper acknoledgemnent [sic] to Y and X)?
Yes, the MIT license does not restrict downstream use of the software beyond the notice requirement. In particular, the MIT license is a permissive open source license that allows use in proprietary software.