I think there's a big difference in correcting the memories of someone who may be a bit confused compared with telling someone to do something which affects their health or wellbeing. My grandmother would ask the same question over and over and it was easier to keep answering instead of pointing out that she kept asking, no matter how frustrating it got.
That said MIL, who does not have any memory problems, used to come out with some interesting (and totally incorrect) stories, often involving my mother, and I was sometimes tempted to challenge her, but decided against it. I'm fairly sure she only said them to FIL or OH, and it wasn't malicious stuff, just a bit odd, so it wasn't hurting anyone.