i would recommend you to upgrade to a HD 5750, MSAA is a technology enhances visuals and the quality of the picture drawn in the screen.
HD 4850 will be fine if you play at medium settings, if you want to play @ high quality get the HD 5750.
Consoles are different than PCs, so yes if you upgrade to a good GPU you'll get better quality.
It is one of many anti aliasing methods that helps improve graphics quality. It's actually quite complicated to explain. Generally speaking though, the higher you set it the more the graphics quality can be improved, but it also lowers performance. Set it too high might result in a slide show if your video card is not powerful enough.
Here is the link that you can see a HD 4850 on MEDIUM list, but they are put 1920x1080 res and say that on lower resolutions game will run better. Also, we know that 1280x1024 is much less than 1920x1080. By this I think that I can get HIGH on my resolution. HD 5750 is on MEDIUM list too, and not much better than HD 4850.