When we imagine something fictitious or remember something that happened, it is very much like experiencing it now. It is not an identical conscious experience but very similar. Things can slip from the future to the present to the past without much change in them. Even dreams, which are none of these things, seem to be constructed with the same building blocks. It is as if the brain uses the same workspace, tools, methods and materials whether it is constructing a fantasy, a forecast, a perception, a memory or a dream.
Two differences between dreams and the other experiences is that dreams do not seem to have the same narrative sense and they are not usually remembered. Sensory input is inhibited, action is inhibited and the brain seems to just free wheel in a state that is protected from the real world. What is going on is a mystery but probably it is a form of essential neural housekeeping.
Windt and Metzingers contribution to The New Science of Dreaming:
dreams are conscious experiences because they can be described as the appearance of an integrated, global model of reality within a virtual window of presence. From a purely phenomenological perspective, dreams are simply the presence of a world. On the level of subjective experience, the dream world is experienced as representing the here and the now. And even though it is a model constructed by the dreaming brain, it is not recognized as a model, but is experienced as reality itself. Put in philosophical terms, one can say that the reality-model created by the dreaming brain is phenomenally transparent; the fact that it is a model is invisible to the experiential subject.
Of course, the same point can also be applied to waking consciousness: even in wakefulness, our experience of the external world is mediated since we never recognize that the reality-model experienced in wakefulness is, in fact, a model, we have the impression of being in direct contact with external reality we live our lives as naïve realists. In this very general sense, the conscious experience of dreaming is no different from waking consciousness.
The fact that waking consciousness must be turned off before dreaming consciousness begins and the fact that we cannot be conscious of more than one reality at a time in waking consciousness does imply that the same neural machinery is used to construct all types of consciousness.