ISO determines how sensitive your sensor is to the light. The higher the ISO value, the more light your camera can record. The downside is that the higher the ISO value the more noise you will see in the image. Noise is the grainy, gritty like effect you will sometimes see in your images. I always try to shoot at the lowest ISO value that I can.

Your apeture setting is what can create a soft, blurry, out of focus background. The apeture is the opening inside your lens that lets the light pass through it an onto the sensor. The effect is called Depth of Field (DOF). This is the area in front of, and behind your focal point that is acceptably sharp. The bigger the opening - such as f/1.8, the shallower the depth of field. With a shallow depth of field you will get that blurry background. Great for portraits, and shots that you really want to isolate one subject and make it stand out. The smaller the opening - such as f/16, the deeper the DOF, meaning much more of the stuff in the image will be in focus. This is ideal for lanscape shots, when you want to be able to see everything nice and sharp.

Bryan Peterson has a book called Understaning Exposure This book does an amazing job explaining this.
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