Image interpolation is a feature implemented in Adobe Reader. Quotation from the PDF reference:
When the resolution of a source image is significantly lower than that
of the output device, each source sample covers many device pixels. As
a result, images can appear jaggy or blocky. These visual artifacts
can be reduced by applying an image interpolation algorithm during
rendering. Instead of painting all pixels covered by a source sample
with the same color, image interpolation attempts to produce a smooth
transition between adjacent sample values.
This feature has to be enabled explicitly, though:
Image interpolation is enabled by setting the Interpolate entry in the
image dictionary to true. It is disabled by default because it may
increase the time required to render the image.
pdftex.def in TeXLive supports this feature:
It may, however, be a matter of taste whether the result is an improvement or not.