How do you say “imagination” in German?

The German word for “imagination” (in the sense of forming images in your mind) is Phantasie (f.), also spelled Fantasie (from Greek phantasia, from phainein, “to show”).

An “illusion” (in the sense of a false or misleading mental image) is either Illusion (f.) or Einbildung (f.).

Note: The action of imagining something is sich etwas vorstellen in German.