At this stage, your child will be able to know the difference between fantasy world and real world. though at times she might still get confused. Be prepared for her to mix up the real world with that of the fantasy and believe it's true. By and large, your child’s capacity to make the distinction will develop better as her brain matures, yet parental help is required to achieve this significant milestone.
What can you do
Discourage excessive indulgence in exaggerations. Make it clear to your child that you expect her to tell the truth and facts as it is. In case, your child fails to do so, take the initiative and display evidence to her on what actually happened. Educate your child about fictional characters in books and television. Read books together to explore the world of relationships, emotions, and ideas the way she sees them. Respect her world but not without putting in your own thoughts.
You can also introduce the concept of acting and let your kid perform a skit based on her favorite character. Record it and show it to her. Tell her that the ads and shows on television are filmed in a similar manner where you are not the character and only ‘playing’ a character.