We investigate the dynamic effects of an inducible prey defense in the Nicholson-Bailey predator-prey model. We assume that the defense is of all-or-nothing type but that the probability for a prey individual to express the defended phenotype increases gradually with predator density. Compared to a defense that is independent of predation risk, an inducible defense facilitates persistence of the predator-prey system. In particular, inducibility reduces the minimal strength of the defense required for persistence. It also promotes stability by damping predator-prey cycles, but there are exceptions to this result: first, a strong inducible defense leads to the existence of multiple equilibria, and sometimes, to the destruction of stable equilibria. Second, a fast increase in the proportion of defended prey can create predator-prey cycles as the result of an over-compensating negative feedback. Non-equilibrium dynamics of the model are extremely complex.