There are only Two choices a programmer makes:
Linear Story, with pre-placed Monsters. the entire map, is stored in memory.
Random encounters, meant to represent the encounter of a creature thats not integral to the plot, are usually based on your level so you are not severely hampered.
The Third Plausible choice is currently impossible to impliment. All creatures in the entire world are organised and placed, but an internal AI controls their movements and when you come across a creature, its because its Actually there at that exact time. This means you would encounter creatures of any possible level, at any given time, if your in the wrong place. It would be a great game, but as I said, impossible to impliment yet. (p.s. I'm working on it)