Time Machine doesn't create bootable backups. If you want to make bootable backups, you have to use an app as Carbon Copy Cloner or SuperDuper.
Mid 2007 iMacs can use 6 GB of memory. You can buy the memory in OWC or Crucial > http://eshop.macsales.com/shop/apple/memory/iMac/Intel_Core_2_Duo
Does Time machine work as an external bootable drive?
Was suggested to me that I can actually increase to 6 GB memort.
Is this correct? Do i have to then get 2 3 GB memory cards to do so? do they exist?
You can use this Link to check which RAM is suitable for your Mac...
It is Important to get the Correct and Matching RAM
For best performance, fill all memory slots, installing an equal memory module in each slot.
That site also has videos on how to Install RAM should you need it...
In case you're confused by the apparently conflicting responses, a Time Machine volume on a locally-attached hard drive (not a network drive, such as a Time Capsule) is bootable into Recovery, provided that you have a recovery partition on at least one of the volumes being backed up to it. The effect is the same as booting from the recovery partition on the source volume, with one difference: you can partition the boot drive in Disk Utility, which you can't do while booted from it. To boot in this way, hold down the option key at startup.
You can't, however, boot into a copy of the source system on the TM volume.