I believe that setting is used to set the default period for silencing or suspending a user when they are manually suspended from their admin page. It fills in the date that is set in the screenshot below, but it can be manually overwritten if you wish:
It would be great to see a moderation guide that gave examples of issues that have arisen on Discourse forums and how they were resolved. Even fabricated scenarios that mirrored what can happen in the real world would be useful. My sense is that the types of issues moderators have to deal with varies greatly, depending on the nature of the forum.