She's senile and her "reality" has changed. My stepmother went through that. She can't "come back" her brain is old and damaged/worn out in areas. I would just go with it, not "correct" her; treat her sweetly and kindly. She is not being hurt by anything you say and forgets it if you correct her but you're right, making her feel bad doesn't help anything.

I still remember in the hospital after she'd fallen and broken her shoulder, my stepmother telling me to go into the bedroom and get her hairbrush off her dresser. . .