How can a television produce 120hz video? Does it interpolate every other frames?

that depends on the type / brand / age of the tv. I live in the uk so we go from 50hz to 100hz, but i imagine it's done the same way. on older crt sets they doubled the frame rate by showing each interlaced field twice, which is why you used to get "motion judder" with the exception of philips who used to use interpolation in their pixel plus system, but now on more modern lcd and plasma sets, they do indeed use interpolation to double the frame rate by analysing each surrounding frame and making up a frame to go in between.