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There is no definite line between fiction and literary fiction. The distinction between the these two terms is very similar to the distinction between "fine art" and "decoration".
Literary fiction is probably best understood in contrast to genre fiction and pulp fiction. Detective stories, fantasy novels, and espionage thrillers are all examples of genre fiction. These books tend to rely on plot centrally and tend not to employ poetic devices as heavily as literary fiction does.
This means that, in general, when reading fiction you would expect to see more use of metaphor, allegory, allusion, motif, and the whole panolply of poetic devices than you would when reading genre or pulp fiction.
Again, there is no firm or definitive line. Some contemporary writers of literary fiction have eschewed use of metaphor to experiment with "surface texture". These writers, however, remain deeply interested in character, psychology, and many literary issues that have little to do with plot.
The difference between literary fiction and (genre) fiction is that literary fiction focuses upon style and depth, and is character driven, where as (genre) fiction is plot driven, has a broader viewpoint, and focuses on imaginary viewpoints.
1 - (Genre) Fiction is imaginary or creative writing; for example a short story or a novel in narrative form.
2 - Literary fiction is serious writing about serious issues or dilemmas that are prevailing in our society.
3 - Literary fiction is character based; deep innovative thinking that provokes intellectual thoughts, and may alter beliefs (this could be an essay for example).
4 - (Genre) Fiction is built around a climax of action, protagonist and based on a beginning, middle and end.
I hope I have helped :)!
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