My wife frequently asks what time deceased friends are arriving that evening. Is it better to tell her they're dead or just not coming then?

You are doing the right thing to tell her those friends can't come tonight. You might move on to talking about the friends a bit. "That Bill is a real character, isn't he? Remember the time he ..." If they are on her mind she might enjoy a little reminiscing about them.

Lie to her.

Is she dreaming of dead people? Sometimes that is a sign of depression and it can be treated by the MD.

It is harsh to tell your wife that her friends are all dead and not coming to dinner. Harsh and unnecessary.

Your way of handling it is best. Tell her that her friends are unable to make it tonight. That you have to tell her this every evening is how we deal with our loved ones who have dementia. It's unfair and uncomfortable and it bothers us but when dealing with someone with dementia we take the way that is unlikely to cause pain day after day.

You're doing the right thing.