Visible crew/equipment: When the Gatekeeper opens the gates, a stage light is reflected on the column on the left. It wasn't there in the previous wide angle when the group arrived. (00:59:44)
Visible crew/equipment: After the snowstorm, the group sets off to see the Wizard. When they're way ahead, there's a huge rectangular moving shadow cast over the yellow brick road. Seemingly a camera or crane of some sort. (00:57:44)
Revealing mistake: When the Munchkins say goodbye to Dorothy while singing "Follow the Yellow Brick Road," the lower part of the screen is an absolute mess: footage of Munchkins superimposes with other footage of Munchkins, creating a blurry havoc, plus the matte painted flowers, hut, and people clip through the real actors. (00:33:35)
Visible crew/equipment: When Dorothy is in the Witch's castle, as the Wicked Witch goes to get the hourglass, the camera's shadow can be seen moving on Dorothy's shoulder. (01:17:55)
Other mistake: Toto is listed in the end credits as being played by Toto, when she was actually played by a dog named Terry. A few years after the film was released, Terry's owner/trainer, Carl Spitz, changed the dog's name to Toto due to the popularity of the film, but the credit is wrong for the time.
Continuity mistake: When the Witch flies off to Emerald City the monkey is standing by the window sill. The outside angle, where the window and rest of the set are a matte painting, has the Witch superimposed, but not the monkey. (00:57:56)
Answer: In the film it's left ambiguous. At the end it's strongly implied that she was dreaming. The characters she meets all look like people she actually knows. In the original book, she actually went to Oz.