Everyday contextual settings create associations that later afford generating predictions about what objects to expect in our environment. The cortical network that takes advantage of such contextual information is proposed to connect the representation of associated objects such that seeing one object (bed) will activate the visual representations of other objects sharing the same context (pillow). Given this proposal, we hypothesized that the cortical activity elicited by seeing a strong contextual object would predict the occurrence of false memories whereby one erroneously “remembers” having seen a new object that is related to a previously presented object. To test this hypothesis, we used functional magnetic resonance imaging during encoding of contextually related objects, and later tested recognition memory. New objects that were contextually related to previously presented objects were more often falsely judged as “old” compared with new objects that were contextually unrelated to old objects. This phenomenon was reflected by activity in the cortical network mediating contextual processing, which provides a better understanding of how the brain represents and processes context.