In what narrative perspective is the narrator an observer, not a character in the story?

The correct answer is that the narrative perspective where the narrator is an observer and not a character in the story is third-person. In this perspective, the narrator remains external to the characters and the plot, offering an overarching view of events and insights into the thoughts and feelings of multiple characters, if it's omniscient. This allows the narrator to maintain a detached position, observing the actions and dialogues without being involved in the storyline.

First-person perspective features a narrator who is a character in the story, using "I" or "we," which does not fulfill the requirement of being an observer. Second-person perspective directly addresses the reader using "you," which also does not align with the characteristics of an observer since it involves direct involvement with the perspective of another individual. Limited third-person perspective does keep the narrator outside the story but focuses mainly on one character's thoughts and experiences, so it isn't as detached as the broader third-person perspective. Thus, the third-person perspective correctly describes a narrator as an observer in the narrative.