I'd have Joe tell the party a wild story about little evil green men that had fire in their eyes and smelled of the swamp. Not only did Joe's hounds flee from the beasts, but they refuse to come out from under the porch even now, a week later. One of the creatures spoke the vile language of the 9 hells themselves, and when he spoke to the cows, they fell ill with a wasting disease. Don't just drop the name and describe, describe the encounter the way a superstitious, uneducated, rather naive and terrified commoner would. Exaggerate things, make things up, omit important clues. Evil green midgets with flaming eyes that smell like a swamp? Who's going to guess its a mundane encounter like goblins? It brings a whole new level of depth and immersion to the game.
The same concept can be applied to magic, consider this:
Jane the barmaid: "That evil cleric cast cause blindness on me and robbed me!"
Jane: "He had a strange symbol on a chain around his neck, and was chanting in a language I don't know. Suddenly, everything went dark and I couldn't see! Gods help me, I don't know what I'd have done if the priest from down the road came along and spoke the words of Odin over me, bringing light back to the world!"
Strange symbols and weird languages is pretty vague, maybe a cleric of an evil god, maybe a magic user. Was Jane the victim of cause blindness or a darkness spell. Did the cleric cure blindness or dispel a continual darkness? The PCs could go interview the cleric and find out more, but that too can lead to more mystery and adventure.
Overall this serves to keep the story and role playing in the game, and avoid it just becoming a series of boring encounters with boring monsters. But what do the PCs, as well as the NPCs, know about the monsters and magic of their world? I suggest the following quick dice rolls to find out:
Chance to recognize a monster (either upon seeing it, based on what legends and tales one has heard, or guess what monster someone is describing):
PC Level + 1/2 INT score - Monster HD
Roll this number or lower on D20 for success
Remember that normal "men" (unclassed NPC commoners) are considered to be level 0 and have average INT (9).
Chance to recognize a spell being cast (but not identify the spell)
PC Level +1/2 INT score - Spell Level
(Elves and MUs get their full INT score added to their level when facing spells of their own type, likewise with Clerics when facing a clerical spell being cast)
Chance to identify a spell being cast (Only if the character has access to the spell in question; ie it's in their spellbook for MUs and Elves, or they are high enough level to cast it)
PC Level + 1/2 INT score - Spell Level
Non spell casters can attempt this, but with no INT modifier, a simple PC Level - Spell level check is made.
Always round down, and note that on all these checks, there is no auto success if a natural 1 is thrown. A zero level commoner with 9 int trying to identify a 4 HD monster (0 + 4 - 4 = 0) has 0 chance of success. However, to preserve mystery (PC "well, darn, I rolled 19, this sucker must be at least 8 HD!"), the roll should always be made.
The exception to the rule:
But they were trolls. Obviously trolls. Even Bilbo, in spite of his sheltered life, could see that: from the great heavy faces of them, and their size, and the shape of their legs, not to mention their language, which was not drawing-room fashion at all, at all. - JRR Tolkien, The HobbitObviously, in your campaign, some monsters and magic are so ubiquitous that almost anyone will recognize them.
Who in their right mind wouldn't be able to correctly state that the evil magic user cast a fireball? Or that the goodly cleric cast a light spell to guide the lost children through the dark forest?
And of course, everyone knows what a dragon looks like. They're iconic and hard to miss. But a wyvern? A pterodactyl? Either of these creatures might be easily mistaken for a baby dragon by the naive.
A little discretion and common sense on the DM's part can go a long way.