A couple of points I'd like some advice on, I decided to put them both in here to avoid double posting. First of all, to what extent does the adage 'don't call a rabbit a smeerp' apply when the name that something has no longer makes sense in the world of the story? Specifically, that idea of 'fairytale' in a world that has no fairies or tradition of fairies. Should I use a different name (nymph-tale is the one that currently comes to mind) or just use the real name and hope that no one cares about the fact that it doesn't quite fit. Secondly, and sort of related, when you read a fantasy novel do you think 'ah, the people in fantasyland are speaking English' or do you think that they are speaking a language of their world being translated into English? This seems a rather anal question even to me, but I'm asking because in my WIP there is a sliding scale of verbosity with Orcs at the top, then upper class humans, then the plebs. One way I thought of explaining this is that they are speaking subtly different dialects, but that requires acceptance of the translation convention. Or should I look for an explanation that accepts they are all speaking English, just with differing degrees of purpleness?
I don't care if it's meant to make the story feel more authentic or politically correct, it annoys the hell out of me when writers make up their own languages. J.R.R. Tolkien, Christopher Paolini, I don't care who you are, it's obnoxious. There are some exceptions to this but I think it's overdone and unnecessary more often than not.
As a reader and someone who loves watching TV/Movies I always think that what ever they are talking is just translated. If a couple of Russians are speaking in Moscow on what seems like an ordinary day, then they are speaking Russian. However to make things easier its all translated into english. I think most everyone is like this. So I wouldn't worry about your fantasy world speaking English.
I think movies set in our world feel more authentic if the languages are correct. WW2 dramas where the Germans speak english (with a german accent) always seem kinda silly to me, like they were made for kids. But in movies there's subtitles to make it easy -- not the same case for books. As for fantasy, well...it's fantasy. You should be able to suspend your disbelief that far if you can believe that people in another world look just like humans, too.
so you are asking what a fairy would be called in a world where fairies and fairytales don't exist. Basically, you are asking what to call the little creatures with wings that fly around in the forest...since the people in your story have never encountered them either through the telling of stories or in real life. How do we name anything? We see it, and if it doesn't have a name, it is usually named somehow after the person who discovers it, like many of the names for elements we have in our world. You could name them whatever you want, as long as the reader can understand what you are describing is basically what we would call a fairy.
I actually don't, at all, read fantasy. No issue with it but everyone has the thing the gravitate towards. Fantasy isn't mine. I felt worth mentioning in my feedback. The different names for describing like animals/things transposed from the real world to fantasy....Seems to me that is an 'oompa loompa' problem. If you give it a different name, it runs the risk of being taken in a manner that Charlie and the Chocolate Factory would give you. Now, I realize with Charlie that it was intended in that context but if your intent is a more 'real' fantasy-type world, that could be a problem. If you choose a name, I would be apt to think it would be something of an aggregate name of familiar words, otherwise you go from the good of a hippogriff versus the nonsensical of a heffalump. It's ok to give it a name but it needs to be very descriptive so that the reader gets the idea of what kind of 'thing' it represents and does not throw them out of the fantasy world. This would all be in my 'non-fantasy' opinion.