To simplify the polynomial expression \((xy - 2)(x^2 + 1)\), we will use the distributive property (also known as the FOIL method in specific cases). We will distribute each term in the first polynomial to each term in the second polynomial.
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Distributing \(xy\): \[ xy \cdot x^2 = xyx^2 = xy^1 x^2 = x^3y \] \[ xy \cdot 1 = xy \]
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Distributing \(-2\): \[ -2 \cdot x^2 = -2x^2 \] \[ -2 \cdot 1 = -2 \]
Now, combining all these terms together, we have: \[ x^3y + xy - 2x^2 - 2 \]
The final simplified expression is: \[ \boxed{x^3y - 2x^2 + xy - 2} \]