Final answer:
An economy moves up the short-run Phillips Curve when there is higher-than-expected inflation, leading firms to employ more labor due to the tradeoff between inflation and unemployment represented in the Phillips Curve.
Step-by-step explanation:
An economy will move up along the short-run Phillips Curve when the inflation rate is higher than expected, causing firms to hire more labor. This relationship between inflation and unemployment is represented by the Phillips Curve, which posits an inverse relationship between the two economic indicators in the short term. However, this tradeoff is not permanent, as the curve may shift based on long-term economic factors.
The Phillips Curve concept originated from observations in the mid-20th century, suggesting that lower unemployment in an economy is typically associated with higher rates of inflation. The reason is that with lower unemployment, workers have more bargaining power for higher wages, which then gets translated into higher prices by firms to maintain profit margins, thereby causing inflation. Conversely, higher unemployment can lead to lower wage pressure and thus lower inflation.
Despite the short-run tradeoff, the long-run Phillips Curve becomes vertical, indicating that there is no tradeoff between inflation and unemployment. This change in the relationship occurs because, in the long run, inflation expectations adjust and other macroeconomic factors, like changes in aggregate demand and supply, come into play. Ultimately, the economy cannot sustain a lower unemployment rate without triggering inflationary pressures, unless there's an outward shift in the aggregate supply curve, such as from technological advancements or a decrease in energy prices.