My sibling family: I'm the oldest of 5. I say it, that's the way it is. In reality, it's me (from Dad), step-sister (from Mom), two half brothers (from M&D) 10yrs younger than step-sister, and our adopted sister (from M&D) who's 7. The four older were all raised together, so the "step" and "half" is rarely spoken, if ever.
Our 7yr old sister, on the other hand, just knows that we're siblings, brothers & sisters. She knows she's adopted, but since that concept hasn't really "hit" her yet, the idea of step/half etc., is WAY out there. Of course since her sisters are 25+ years her senior, she pretty much thinks everyone is her sister or brother! When my sister (step-sister) had a baby and we tried to explain to the 7yr old that she's an Aunt, well, that just made no sense to her. It's her sister, just like everyone's her sister.
I think it's great that your DHD said "sister" without the half. Shows good character on her part! I get annoyed actually when people correct me and tell me my brothers are my half brothers. Half, to me, sounds like they don't know who I am.
As far as explaining the familial relationships to your little ones, I'd definitely tell them that these older people are her brother and sister, just like the new baby will be. Who doesn't want more siblings!! The neice/nephew concept might be hard to grasp until Much later though.
We thought the 7yr old would LOVE the idea of being an "aunt". Not so. She's perfectly happy with another "sister". Unless you need the correct title, your kids don't care. They just like having family around. They'll figure it out eventually, when they overhear something that doesn't make sense.
Have fun with your family outings!! certainly Fun in my family. babies here, little Chinese person there, my dad with his 60+ white hair. You can tell the servers at restaurants are totally confused :-)
single, WAH home, to my only very kind & sweet lil man