I'm quite pressed for time, so forgive me as I didn't read any of the other replies.

If I were you I would try to explain to your mother-in-law that the baby already has a Mom-mom. Even though your Mom-mom has passed away she still does and always will hold a very special place in your heart. You want your baby to hear stories and to know about your (and his) Mom-mom.

I simply called both of my grandmothers "grandma". I was very close to one of them and almost never saw the other. A sweet lady that I knew (she passed away just 2 months ago) was known to everyone as "Moms". Her grandchildren were the first to call her that, but as they grew up everyone else started calling her that too.