How, exactly, is it disrupting the classroom environment?

Just to clarify: you say you're a TA, are you the primary instructor for the course or is someone else the instructor of record?

@JohnFeltz Students start looking at her and gossiping, instead of paying attention to class. I have noticed that the days she does this, the attention level of my students is considerably lower. The rest of the days, when she is wearing standard clothes, classes are normal.

@ff524 I'm the primary instructor.

@je_b Thanks. You should edit your question to add that information.

Are you supposed to intervene, or it's the department's head who is supposed to intervene?

No matter what you decide to do, know that there will always be rumours of some sort.

I heard of a case where the the teacher brought a sack (or a poncho?) to throw over that student. Perhaps it was just as a humorous comment (without actually demanding to wear it) to signal that there is a problem, but, depending how sensitive your admin/students are, it may not work. Talking casually about your "boyfriend", though, will dispel any doubts about your potential unwholesome interests in unsatisfactorily clad students ;-)

Lowering the room temperature might force her to wear more clothing.

"I am staring [sic] to think" - who let Freud in?

I don't quite understand all that "free country" routine. Just because it's not illegal doesn't mean a school or a TA can't do anything about it. Chatting in class is certainly not illegal but you still ask students not to do it.

@CaptainEmacs Assuming that bi people don't exist?

Sorry but when there are questions like this I can't help asking for proof so we can judge ourselves. These things are too subjective.

@TRiG If you do it with full qualification, exception capture, special clauses for border cases, multi- and polyamory, including convergence conditions at infinity, with special license for admitting vs. rejecting axiom of choice, well-orderedness, and the Lemma of Zorn (German for "Anger"), yes, the statement may be precise, and infallible, but the joke - is dead. The students' assumptions that the lecturer is interested had certainly not been informed by such incontrovertible deduction.