Final answer:
Potential output, also termed as full-employment GDP or potential GDP, is the economy's highest sustainable output level achieved when all resources are efficiently utilized, coinciding with the natural rate of unemployment. Hence, the correct answer is option B.
Step-by-step explanation:
Potential output, often referred to as full-employment GDP or potential GDP, represents the highest amount of goods and services an economy can produce when it is most efficiently using all its resources. It occurs when the level of employment in the economy corresponds with the natural rate of unemployment, meaning the unemployment rate that is expected in a healthy economy due to factors like job transitions and skill mismatches, not due to economic downturns.
It's important to distinguish potential output from actual GDP, which is the real output level of an economy at a given time. Potential GDP is a theoretical concept which may align with actual GDP only when the economy is operating at full efficiency. In such cases, unemployment is at the natural rate, which is a variable measure and not a fixed percentage. Potential output is crucial for policy makers and central banks as it guides them to gauge the health of an economy and assess inflationary pressures.