Note that the Keil evaluation tools will only generate code starting from address 0x4000 (I think - check your documentation and/or the Keil site)

2 When refers to external memory, does it mean RAM or EPROM?
When what refers to external memory?
Usually, "external" does mean "outside the 8051 chip"
However, this can get confusing with some derivatives (eg, the Triscend E5) which has an 8051 "core" and some memory integrated onto a single chip; in that case, "external" could mean "external to the 8051 core" or "external to the chip" - it could depend on the context.

3 Does CODE memory mean EPROM or RAM?
Neither.
Code memory is simply where the CPU fetches its code from - which your particular application might implement in RAM, ROM, EPROM, Flash, or whatever.
(the CPU can also read data from Code Memory by using the MOVC instruction).