How many words are toddlers "making up"? My 20-month old has learned many words to express herself.  In addition she says many other words that are indecipherable from context nor pronunciation.  It's most noticeable in novel or unusual situations.

Is she inventing words to express the new or not-yet-learned situation?  If so, (until she learns the "correct" word), will she continue to use the invented word for a while, or will she invent a different word should the situation recur? What does the literature in developmental psychology have to say about this?
From my knowledge.  Children do make up words and sounds that feel similar to the ones they are intended to mean.  However, as the child develops these pseudo-words begin to disappear.  New temporary replacement words may form as they begin to understand that they are not using the correct words.  However, developmentally a child should be speaking in full sentences by about 3 years old and definitely by 4 years old.  They will most likely continue to have problems with various connecting words, plurals, and saying words how they appear to sound (even if they say them wrong). 

It helps with their learning to break down words into syllables so that they can grasp how each sound works together to form the words that you are using to communicate with them.  I'll see if I can find my old developmental psychology book to back this up more, but I'm going on a class I took years ago.  That and watching 3 kids move through the stages (got a 22 month old, 3, and 7 year old myself).