Final answer:
Potential output refers to the economy's maximum possible output when it is utilizing all available resources efficiently, which corresponds to the point where the aggregate supply curve becomes nearly vertical, indicating full employment and resource utilization.
Step-by-step explanation:
The term potential output, often referred to as potential GDP or full-employment GDP, is best described by relating to the concept of aggregate supply (AS). The aggregate supply curve illustrates the total quantity of output that firms are willing to produce and sell at any given price level. More specifically, at the far right of this curve, it becomes nearly vertical, indicating the economy's potential output. This is the level of output where all labor, machinery, and other inputs are fully employed, and any increase in the price level does not lead to an increase in output. Consequently, potential output represents the maximum sustainable output of the economy, assuming full employment of resources without leading to inflation.
Therefore, the correct answer to the student's question would be:
d. The maximum possible output for an economy. This is because potential output refers to an economy's capacity to produce goods and services when it is employing all its available resources efficiently, hence operating at full capacity.