Our almost 4 year old granddaughter is going through a similar phase the last couple of weeks. We babysit her during the week, so we get a lot of time to observe that we didn't when our girls were little.
She spends a lot of time in her own fantasy world exploring her imagination and she is preoccupied with her own thoughts. If we interrupt her, she's sometimes only half listening. Most of the time what we're asking of her is not critical (like getting out of the path of a car), but when we are preparing to go somewhere in public, it's important to lay the groundwork with her that she needs to come back to earth and pay attention to our instructions.
It's important that young children especially have time to themselves to get in touch with their imaginations. We actually play into it with her, which is an effective way of reaching her sometimes.
These days she has a "boyfriend" who misbehaves and treats her badly. I've told her that he sounds like trouble and she needs to tell that troublemaking boyfriend to hit the road. If her friends won't treat her right and behave then she needs to find other friends.
Another big item with her is that she "learns things in her class". She doesn't go to preschool or any organized activities right now, but she's always talking about her class and her teacher and what she learned. When she sees a bus, it's her school bus that she takes to class. She asked me a couple of times last week if I'd pick her up from her class, and of course, I said I would. She's obviously preparing herself for going to school.
In the last several months especially, she has very big into story telling. You might call it lying, but there's no malicious intention involved. She's just telling stories.
She clearly understands a line between fantasy and reality, but she chooses to blur that line to "try on different feelings and scenarios".
The last couple of weeks she's been making up her own versions of words. (My mom said I used to do the same thing when I was little. It wasn't that I didn't know the words. I just like the way mine sounded better.) Last week she was talking about a hop grass. I ask her if she was talking about a grasshopper and she smiled that she was.
So for now, we're just enjoying her stories about her baby sister/brother, the baby she's growing that will come out her navel, the misbehavior and the knowledge she's learning about at her class, and especially her life as Ariel the mermaid when she's swimming. Her grandfather is Neptune and she has to save Prince Eric from all kinds of trouble. The sea witch Ursula is always planning some kind of devilment that has to be disrupted.
Pick and choose when to apply discipline for now and assure that your son has time in his day for role playing and play acting. Don't be afraid to enter his world on occasion either. It can be endlessly entertaining.