You sand down the build primer coats so you have a good base, using guide coats you go from 200 to 400; clean up and shoot the sealer coat. Following the seal coat instructions for dry/tack time you apply the color coat, and you shouldn't need to sand that at all unless there was a real issue, but again following the application guidelines for that paint you may need to sand a little and reshoot. Paint coats are meant to go on wet, so unless you are specifically using a paint that calls for sanding between coats you don't do it. You do follow the dry/tack times for the paint system(s) as well. Base/clear systems are more forgiving if you cause a run or get a bug stuck in the paint, you CAN sand that out and reshoot with only a few things to be careful of. You apply 3 or 4 coats of color on the vehicle per dry time instructions and DON'T sand anything unless like above you get a flaw. Then you shoot the clear, same idea, put on the 2 or 3 coats of clear needed and DON'T sand anything. Now the clear can dry/set and you can sand to get rid of any orange peel.
For sanding, you need both a mechanical and chemical bonding, which is what the 400 does, could go to 600 if needed. The big thing is don't skip over from 400 to 1000 or 200 to 600, there are reasons the multiple grits are used because course grits DO produce micro-swirls and gouges the next grit is intended to ease, and failing to use the intermediate grit (200-400-600 or 600-800-1000) means more work in the long run. Once the clear is on you can go from 800 to 1000 and higher grits dependant on needs but they make polishers and cutting compounds for those times when getting towards 2000 grit on a consumer car paint job.
Have to be using some good guns, cleaned and conditioned air with enough CFM and not just pressure for the guns. If you don't have a 60-gallon air tank compressor you better know a few tricks. If you're just using spray paint on your vehicle you won't ever get a good result ...
If you are using real automotive paint and sanding between coats you're doing it wrong, it takes normally 2 or 3 passes over a panel to get any build-up TO be able to sand.