If you close your eyes in a dark room, and sleep, where are the dreams produced, and how is it we can see light?
Our mind makes it up out of memories, like the rest of Lala Land. 
do you visually see the things you daydream?
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Daydreams can be very strong, especially if it is very silent or we are falling asleep, but we never visually see them like we see thing i real life. It is more like the “images” we get when we remember something. It crosses the line into a dream when we get actually sensory impressions. 
They are “false” impressions coming from the brain, not the eyes/ears etc.