What should I do when getting a C in a core graduate course as an undergraduate planning to apply for grad school in applied math?

I'm a third year undergraduate student planning to apply for graduate school in applied math. I have done REU in applied math and had one conference paper. I had decent grades in my undergraduate math courses: mainly A's and A+'s and only a few A-'s. However, I ended up with a C in my first graduate course(Real analysis), which is really discouraging to me. In fact, out of all 20 people in the class, including all the graduate students, only 2 ppl got A and the rest are split into B's and C's. I was originally planning to continue with the sequence (the B part of the course), work harder and get a B or above grade, but after the professor told me that he is going to have even higher standards this semester, that being said, only people who get nearly perfect scores deserve to pass the course, I'm not so sure now. Based on his new standards, only the two people who got A last semester can pass the course and the rest of us would have failed, which is totally insane. I wonder if I should continue with this course, study really hard and try to pass the course, and hopefully get a better grade, or simply drop the class and try some other grad classes? Also how bad does getting a C in a core graduate class hurts and how else can I make up for it? I'm going to apply for grad school next year so I'm short on time, any advice will be appreciated! I'm really desperate right now.