Can people make a game simulator inside the game

If you're talking about "gameception," yes playing a game where you character is playing a game has been created before, and you may be talking about minigames. A minigame is a smaller, less important game that affects a larger game. For example, in assassin's creed 3 and far cry 3 you can play board games with npcs and in many space games there are hack simulations like in the mass effect series.