Andy seems to be on the right track. I would create a blank 2" x 2" canvas in Photoshop that has a resolution of 300 dpi, then drop my image into it as a layer and manually resize it using the transform tool. Once it looks good, flatten the image and save as a JPG. Then create the 8.5" x 11" canvas (still 300 dpi) and drop the 2" x 2" image into it and duplicate.