I don’t think the term applies here. Hallucination, when it comes to AI models, is when they make up random data with no basis. This, on other hand, is interpolation. It compares two frames and predicts the intermediate frame using motion vectors. And FSR3 isn’t even using machine learning, it’s a bespoke algorithm that they have written.
Approximation would be a fitting term here, just like many things in rendering technology are.