I would guess that this is some kind of data storage device. Imagine an old-fashioned dialup modem, but instead of connecting to another modem at a bulletin board or ISP, it records the beeps on audio tape (probably a portable cassette recorder). Any keystrokes typed on the terminal get converted into modulated tones and recorded. Then when the recording is played back into the device in playback mode, the tones are converted back into RS232 serial data, where they can be viewed on the screen or input to the computer system.
Back in the 80s this device might be used to record a large amount of data coming from a computer system so that it could be reviewed at a later time, rather than printing it all out, or to monitor a terminal connection the way Clifford Stoll did when he was canvassing multiple terminals to catch the "Cuckoo's Egg" hacker. One might also use this to cheaply transfer a lot of data from one location to another without access to a data tape drive or disk.
The parity, baud, and polarity switches would be chosen to match the serial link being used.
Today, this device has no real use, other than as a collectible. It's pretty easy to find a pocket-sized device just like it that will record gigabytes of data straight to an SD card. But if you can find someone who's got a collection of DEC equipment I'm reasonably confident they'd be happy to give it a home for at least $10-$20.
It could possibly have some historic value that I'm unaware of and be worth much more, but if you've already tried searching the web and come up empty that's probably not the case.
