A simple IS‐LM model under imperfect competition and increasing returns is examined. It is shown that when firms maximize profits the values of the fiscal and monetary policy multipliers are smaller than their respective ones under perfect competition. If firms follow a cost‐plus pricing rule, then the values of the multipliers increase but they are still less than their corresponding ones under perfect competition. In both cases the values of the multipliers approach those in the standard IS‐LM model as the mark‐up factor tends to infinity.
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