DNS server performs lookups on the root servers or forwards to Google/your ISP based on preference. Routers/firewalls/whatever use the internal DNS servers for lookups.
Yeah it will use forwarders if they are available. I was more getting at how I have things set up is that the Windows DNS servers are resolving DNS for all clients, even firewalls and switches. So you can do things like reference internal RADIUS servers and NTP sources using hostnames.