We can all agree that it wasn't the teacher's call to make, but firing her is excessive.
I recall as a child that we had a fair understanding of the differences between fantasy and reality. I never really kept to heart that the tooth fairy, Santa Claus, the Easter bunny, or even Halloween witches really existed. I don't think any of the kids around did either (although there was that one kid who had a phobia of masks). We generally understood that they were fictional characters for the sake of fun and fantasy.. Like the Never Ending Story! The idea that they could be real in our minds' eyes was the real anxiety.
Our parents always encouraged us to explore our imagination, but we had to be safe, so they told us the obvious things like "Superman is not real, he can't really fly, it's a movie effect." And eventually the Santa Claus question came up.
I think I was around 7 or 7½ when I was in Infant 3, and besides noticing that every year it was a different guy (or girl) in a Santa suit, we eventually started questioning the nature of old St. Nick. Nonetheless yankin' on the old guy's beard was amusing at the time. Plus there was realizing that the only person I ever told about the gift I wanted was my dad, how the heck did Santa know?! Oh My God Santa is my dad! No, that doesn't make sense. Duh!
I still imagine what it would be like if Santa really existed! The guy would logically have to be fat in order to withstand the cold!