Potential Output refers to:

Potential output, often referred to as full employment output, represents the level of production that an economy can sustain over the long term when utilizing all of its resources—labor, capital, land, and entrepreneurship—efficiently and effectively. This concept is essential as it indicates the maximum capacity of an economy to produce goods and services without triggering inflationary pressures.

When resources are fully employed, the economy operates at peak efficiency, meaning that all available workers are engaged in productive activities, and capital is being used to its fullest extent. This level of output does not account for short-term fluctuations caused by business cycles, such as recessions or booms, which can lead to underutilization of resources or overheating of the economy.

In contrast, the other options refer to specific economic conditions that do not encapsulate the essence of potential output. For instance, the maximum output during a recession does not reflect full employment, while output during inflation does not indicate sustainable productivity levels. Similarly, the total output in a booming economy may exceed potential output temporarily but could lead to inflation if sustained. Thus, understanding potential output as the output achieved at full employment provides a more accurate measure of an economy's long-term productive capability.