It changes the resolution that the games write to before writing to actual screen. Below 100%, is same as choosing a lower resolution in the monitor-resolution selection, but the game (video driver) will handle upscaling internally and you can be sure to have the right aspect ratio.
Choosing higher than 100% is like using NVidia DSR ("Dynamic Super Resolution") and also a bit like SS-Anti Aliasing. The game pretends your resolution to be higher than actual screen resolution when rendering the image, then scales it down while writing it to the monitor.
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