In theory, the liquid reduces needle vibration. In reality, it doesn't make a big difference. In fact, most pressure gauges use a restriction on the inlet to reduce the needle vibration. This does a lot more than the liquid.

To keep the liquid from leaking out of the gauge, the gauge is sealed with a plug. As the gauge warms up, the heat increases the pressure inside the gauge. As the pressure builds, it makes the gauge read lower. To test this theory when the gauge is warm and reading low, "burp" the gauge by cracking open the rubber plug to let the pressure out. If the gauge then reads higher, you've found the problem. You can then solve it by removing the plug and draining the fluid. Don't put the plug back in.