[slighty]

OK say I want to watch something that has a native resolution of 800-600 and my monitor settings are currently for 1600-1200. What would provide a better picture leaving screen as is and expanding the film to full screen or adjusting the monitor settings to 800-600 and then watch in full screen.

[mduell]

I'd say leaving your monitor at 1600x1200. Let the software do some interpolation math to make it look good.
If you change your screen to 800x600, you've just doubled the pixel size.