Resolution allows a listener to differentiate all elements of recorded sound based on frequency, timing and amplitude. The more accurately those 3 components are reproduced i.e without distortion and without interference, the better the brain can differentiate between sounds based on small differences in tone, spacial position and interrelated amplitudes. For example a reflected sound based on the primary sound’s amplitude, the delay in hearing the reflection, the amplitude of the reflection and the reflection’s tonal spectral shift. When all those elements are correct, you’ll hear a good rendition of the music with the performance venue well resolved. Any distortions in amplitude, tonal accuracy and phase (timing) will blur those subtle differences, which you’ll then hear as a form of distortion rather than as venue detail.
When a system suffers from lack of resolution, those unresolved details don‘t disappear, rather they are just combined with and therefore distort other parts of the music. When the sounds can be properly separated from one another by the brain they are said to be resolved.