Interpolation is the mathematical term for calculation of a new value as an average or the middle of two already existing values. When a picture is to be enlarged, an LCD monitor is supposed to create new pixel information. This is done by calculating (interpolating) some new pixels from several pixels that are close-by and adding them into the picture, hence enlarging it.
This picture shows the separate pixels very clearly. They are white and black. It is the native resolution (the resolution recommended by the manufacturer), which is never interpolated.
This picture shows an interpolated screen. It can be recognized very well from the dot of the I. In the upper picture, the dot is displayed by a single pixel only. Whilst there are only black and white pixels used in the upper picture, the lower picture also clearly shows pixels with values of grey.
Interpolation particularly leads to fonts being displayed less sharp.