Why is "to chleb jest dobre" wrong?
Because "chleb" is masculine, and you used neuter forms of "this" and "good".
Chleb or pieczywo?
"Pieczywo" is a mass noun which translates to "baker's goods" and mostly consists of bread/buns. Without specifying, it will probably be understood as "bread", but the meaning of the word is slightly different.
Why is it chleb and not chłeb ?
It just is. Why would it be "chłeb"?
Good can be written in many ways in Polish.
Sure, but only one is correct in a given sentence.
Is it wrong to say "Ten chleb jest dobrym"?
It is wrong.
You used Instrumental, but Instrumental in such sentences is only used for noun phrases. You just have an adjective on its own here.
More info here: https://www.duolingo.com/comment/16373167