A Simple Macroeconomic Model with Monopolistic Firms.

This paper presents a simple macroeconomic model in which firms outputs are imperfect substitutes, and explores the macroeconomic implications of monopolistic co mpetition. The model is classical in some respects, but Keynesian in others. Multiple or unstable equilibria are not unlikely. Permanent price controls will, in principle, be desirable, since they allow a permanent and efficient increase in aggregate output. Small costs of price adjustment may induce large deviations o f output from the natural rate. Fiscal policy will generally affect aggregate output, but the sign and magnitude of the government expenditure multiplier cannot be determined a priori. Copyright 1987 by Oxford University Press.