She had a 90s Saturn, so Im not all that familiar with the safety features. However, back in the day my mother had a 97 Nissan. The driver airbag deployed after an accident and the car still ran. Just speculating but I think cars of that age, and maybe even today still run after the air bags go off so the car isn't necessarily immobilized after a minor accident in a busy area. This might vary from company to company.
Judging by the front end of the front end of the Saturn it seems likely the radiator could have been cracked, once that gets pushed back towards the engine a whole slew of problems can occur. All in all I wouldn't be surprised if it didn't start after.
As far as the rag goes, it seems like it was fully stuffed in the muffler and not entirely visible until close inspection. A small rag probably would have not caused a problem, a large one maybe. But then you have to consider - a large piece of fabric stuffed into a 2 inch opening...you'd certainly need a broomstick to get it in there. A well driven car is going likely have a warm muffler too, not something I want my hands near.
Also, it's being described as a rag. Your average rag is not big enough to fill the volume of a muffle enough to create problems. Maybe a towel would but a small breathable piece of fabric? I still doubt it could impede air flow enough to make a noticeable difference. If it did - it would have been noticed right from start up with rough idling, sputtering etc.
Its a rag, not a tampon. There's no expansion here.
Ultimately, the rag is indeed an enigma. Either way it was either the worst automotive advice ever or worst attempt to disable a vehicle ever.
If some evil doer was, say, following her and had a small window of opportunity during a gas station stop and wanted cause problems with her Saturn a few miles down the road in a less public area than a gas station...why not just puncture a tire? A medium sized gash to the sidewall or tread and the tire would be flat in 20 minutes or less.
The rag just seems like a lackluster and unpredictable way to sabotage a car, IMO.