Determine where you want the indoor archway to go and cut away at the drywall until the framing is exposed.
Draw the design of your arch on a piece of cardboard and tape it up to ensure that your archway will allow enough headroom.
Cut the 2-by-2 1/2-inch lumber into the desired length of the top and sides of the archway. The total height and length of the wood will depend on the length of the doorway opening and the depth of the arch.
Screw the lumber into the wall framing using 3-inch screws. The top and sides should be secure, as they will hold up the archway.
Saw the 1/2-inch thick plywood into two arches, using the cardboard marking as an outline for dimensions.
Nail one plywood arch into the framing and nail the wooden blocks into the archway, running along the circumference of the arch. Nail the other plywood arch onto the framing and wooden blocks, ensuring the arches align.
Lay the hardboard all along the inside of the arch and nail it into the wooden blocks for support.
Cut a 1/4-inch thin piece of drywall 12-inches longer than the arch and soak it in water. As this drywall is very thin, it may not need to soak extensively to let it bend.
Apply drywall to the entire archway, covering the plywood completely.
Lay the drywall along the inside of the archway and nail it into the hardboard. Secure corner beads along the entire archway using staples.
Mix joint compound and apply it along the length of the arch, covering the corner beads, allowing one layer to set before applying a second and third layer.
Allow the archway to dry before sanding and painting.