OK, this has been bothering for awhile.
How will the picture quality look on a 22" monitor if a game is played at 1280x720 or 1280x800 (Maybe 1204x1024 if it supports it) Will it be scaled to fit the empty spaces or what ?
Depends on the monitor; some may scale/stretch it to fit, some may just display it with borders. Your best bet is to use resolutions that fit your monitor (16:10, 1920x1200, 1680x1050, 1280x800) (16:9, 1920x1080, 1280x720).
When using non-native resolution text and graphics will not be as sharp. The bigger the difference between the resolution of your monitor and the resolution you want to play a game at, the worse the graphics/text will look. Generally speaking though, if you want to play a game at lower than the monitor's native (max) resolution, then it's best if you play the game at a resolution that is divisible by a whole number like the number 2 (or as close a possible)
If your monitor's resolution is 1680 x 1050, then theoretically playing a game at half that resolution (840x525) should result in the best image quality other than using the monitor's native resolution. Of course 840x525 is not a standard resolution supported by monitors so you go with a resolution that seems close to you.