Thermostats work over a temperature range. For example, a 180* t-stat will start opening when it hits 180*, but won't be full open until about 195 - 200.
Also, my OEM temp gauge reads actual temp. It does vary with fan cycling, etc. in traffic.
In addition, in most vehicles, the heater core is part of the engine's internal cooling loop (inside the thermostat). In mine, even before the t-stat opens, for example, with the temp gauge reading 130*, I can get warm air from the heater if I turn it on. Every other vehicle I've driven has been the same way. The water pump still moves coolant in the block, even with the t-stat closed. The flow is just less, due to a typically small bypass hose.
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Call me crazy, but I actually try for mpg with this Jeep:
Typical driving: Back in Rochester for school, driving is 60 - 70% city
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