I actually think it was a little bit of both, in #41. He was having a dream that was presented as nearly real by an alien Highest, and Jake was given full lucidity in it. Despite the fact that it was written by a ghostwriter, I was utterly fond of the "What if?" presented in that book. *Loves it when the bad guys win for a while, even in an alternate universe <3*
But anyway, the place was too utterly bizarre to be a true Yeerk-controlled future. The transparent messed-up aliens, the oddly specific transport system, Tobias as Elfangor and the school with the kids in it. It actually only makes sense as Jake trying to understand various things that were happening in his waking life: The changing personalities of his pressured friends, Tobias as Elfangor's son, Marco's terrifying ruthlessness, his own feelings of helplessness. I've actually had vivid story-like dreams that were nearly as psychological as #41. In my favorite I was asked to consider the real consequences of getting my heart's desire and which loved ones I might wound beyond repair in the process.
It's also intriguing that Jake is asked to make the choice, in context, between his own happiness and the world's future and it's not clear which one he chose. They leave that, seemingly, up to whatever the reader would choose for themselves.