Poor resolution in AirPlay with ATV2?

When using AirPlay to view my MacBook Air (purchased earlier this year), I notice that the screen resolution isn't very good.
Probably a dumb question but because the ATV2 is 720p and the MBAir can output 1080p, is that why I'm seeing the grainy, less smooth computer desktop on my TV?
Mirroring video/audio seems to work fine but when I mirror my desktop is when I notice the poorer quality resolution.

Thanks. I did that already and that's my default setting. It's not fixing the problem. My laptop has direct line of sight to AppleTV and the wifi, too.

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