Final answer:
The correct answer is C. Potential GDP, which is the maximum amount the economy can produce while maintaining price stability. Potential GDP is also known as full-employment GDP and measures the highest level of output without triggering inflation.
Step-by-step explanation:
Which of the following represents the maximum amount the economy can produce while maintaining price stability? The answer is C. Potential GDP. Potential GDP refers to the maximum output that an economy can sustain over a period of time without increasing inflation. It is associated with the level of production when unemployment is at the natural rate, also known as full-employment GDP.
Gross Domestic Product (GDP) measures a nation's total economic output. Nominal GDP calculates this total based on current market prices, which can vary due to inflation. Conversely, Real GDP is corrected for inflation and reflects actual increases or decreases in production. The equilibrium point on a Keynesian Cross Diagram is where aggregate expenditure is equal to national income, indicating the economy's current output. However, this equilibrium output can be lower than the Potential GDP, which suggests the economy is not reaching its full production capacity.
In the provided figures, the Potential GDP is given as $7,000, while the Real GDP at equilibrium is $6,000, indicating that the Maximum GDP that maintains price stability is not being met. Future economic policies and growth could help to close this gap and reach the full Potential GDP.