I came across this problem from a customer who brought his computer to my attention.
He has a dual monitor setup, one HDMI to the TV and the other to the LG 23″ monitor.
All of a sudden the computer loses the correct files for the monitor and it falls back on the Generic non Plug and Play monitor driver that only maxes out at 1024 x 768 resolution. I proceeded to uninstalled this driver and attempted for a restart to see whether if this was just a hiccup; I believed Windows should be able to identify the correct driver for the monitor after the cycle. The method fails miserably and it looks as though there is something wrong with the monitor.
I plugged it into another computer and not so surprised, the monitor works just fine at beautiful 1080p resolution. I also learned that this issue seems to occur on NVIDIA GTX video cards more often than Radeon.
There are two solutions to this annoying problem. Any how, you need to update driver for your NVIDIA video card first before you go any further.
Google for your monitor driver. If you can’t find it go to the other method.
Go to Device Manager (Control Panel » System). Right click on your Generic Non-PnP Monitor and choose Update Driver Software…
Use Browse my computer… » Let me pick from a list of device drivers on my computer then click Have Disk… button.
Navigate to your monitor folder driver. After the system has overwritten the generic driver, you should be back to the native resolution that your monitor supports.
Go to Device Manager (Control Panel » System). Right click on your Generic Non-PnP Monitor and choose Uninstall…
Go back to Desktop, open up NVIDIA Control Panel.
If Windows pops up and installs the correct driver for you, then you are all set. If not, go back to Device Manager again.
Press F5 and right click on your Generic Non-PnP Monitor driver, choose Update Driver Software » Browse my computer for driver software » Let me pick from a list of device drivers on my computer.
Uncheck Show compatible hardware.
On the right box of (Standard monitor types), pick the one that fits your monitor resolution and refresh rate. After the installation you should be able to use your monitor at full resolution again.
Most of the time, updating NVIDIA driver or Windows updates would already solved the problem but sometimes it doesn’t. You may also want to try different connection to your monitor, such as instead of DVI use HDMI or vice versa. Best of luck!