Jeep - 4x4 Basics - SUVs, Sports Utility Vehicles, 4WD, Off-Road 4x4s
has a decent description of the Jeep 4WD systems. The liberty has the command-trac or the optional selec-trac transfer cases. What you observe is normal for the command trac part time case but not normal for the select-trac full time case.
The Command-Trac transfer case has four modes: 2-HI, 4-Lock, Neutral, and 4-LO. 2WD HI is for regular driving, and allows the two rear tires to receive power. 4WD Lock, is used for driving on slippery or loose pavement. This position locks both the front and rear drive shafts together splitting engine power equally between the two axles. Neutral, disengages both drive shafts from the transfer case allowing the car to roll freely; this is used for towing behind another vehicle, for example. 4WD LO is used for situations in which there is very little traction. This position, like 4WD, locks both the front and rear drive shafts together, and by using a lower gear ratio, allows for 2.72 times more torque (however, the speed is limited to around 25 MPH max). Using 4WD Lock or LO on dry pavement is hazardous to vehicle components, through drive line binding and wheel-hop. When negotiating a turn, the front and rear axles rotate at different rates. If they are locked and nothing slips, like a tire with little traction, the drive line will bind up.
The Selec-Trac transfer case has a clutch pack that, when fully engaged, locks the case as above. When not engaged, it acts like the 2WD mode above. The amount of clutch pack engagement is automatically controlled by the jeep's computer which senses things like wheel slip. When set to auto mode, there is always a little clutch engagement, and therefore you feel a little binding until the clutch slips.