Imagination has been found to activate the same V1 cortex that vision does. The V1 cortex is retinotopic, so individual neurons (or at most small groups) act like pixels. There are approximately 280 million V1 neurons, so the neuroanatomical resolution of the visual cortex is much greater than 500x500.

This may not be the resolution we perceive as we imagine, but perception involves many additional systems and bottlenecks (notably, one can train oneself to have a more acute imagination, and there are people who report their imagination to be as acute as their vision).

I have no idea at which level of processing in which of my brain's visual areas my visual imagination is generated, however I can say that the subjective experience is "retina resolution".