When in AWD, the transfer case acts similar to a limited slip differential. It is not completely locked up so you can make turns without chirping the tires and creates less wear on the drivetrain. When in 4WD, it locks the front with the rear so that the front tires turn at the exact same speed as the rear. 4WD should only be used off road or on ice/snow.
I'd like to get a new TB or Envoy AWD and take it for a spin in the mountains to test it out. I've driving AWD systems, they handle very nicely in ice and extrememly slick conditions, almost like a traction control system.
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