Well, that does put a different complexion on this whole situation. She is now about as mature as she is ever going to get. So her mindset is unlikely to transition into something new. But I would still say that you don't want to be engaging with her in a way where you are deliberately eliciting this behavior from her. It's not right to manipulate another person for your private entertainment. That is not respectful of her dignity as a person. It's okay to be a bit bemused when she lapses into this fantasy -sharing. No need to get uptight about it.

I would refer you to Man of constant sorrow's advice that I think shows great wisdom. Do nothing to embarress her needlessly.

There can be a cost to you of enabling this behavior. If she sees that cooking up fairytales is a successful way of getting attention from you, then she has an incentive to do more and more of this. How patient are you really able to continue being with listening to baloney? There may come a point where you tire of being an audience for her fictions. But you'll have trained her to think this is a way for her to relate to you.

It sounds like this lady uses this lying behavior as a way of getting attention that feels good to her. She is trying to get her legitimate emotional needs met in this way because she has found this works for her. You might find this gets old for you. I actually have dealt with behavior of this type, specifically in older women. I eventually found that I got tired of pretending to believe stuff that I didn't believe. Shift the conversation to something more reality based when you can in a gentle way.