It gets a little complicated there. See, there's Troy singing on stage in a musical, and everyone knows he's singing.
However because the film itself is a musical, the songs they sing like "Stick to the Status Quo" are part of the narrative and move the story along.
It's like Pitch Perfect, where the characters know that they are singing because they are performing, but in a musical like Grease, Sweeney Todd, Into the Woods etc. the songs are integrated into the narrative as part of the story.
Let me know if I can help any more:)
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