This (in the video) started after driving in full time in snow a few weeks ago. In the video I am driving in 2wd. When working properly, the indication for the drive seem to activate when the mechanism actually engages into the selected drive, and deactivate when the drive disengages, even if that takes a little while and wheel movement. Therefore, I am not sure where to start troubleshooting this spurious indication. Does anyone have a good starting point?
1988, 4.0L, automatic

 

To me it looks like wiring is shoring out , the place I would look is the wiring that goes to the switch .

 

On an 88 assuming the 231 trans with the front axel disconnect, I'm pretty sure it's a vacuum switch located on the passenger fender up near the firewall. The disconnect feeds a vacuum to the switch when it's engaged, and triggers the light. Follow the vac lines back from the axle disconnect. I have the opposite problem, that the light goes out when in 4wd under lower vacuum (like accelerating hard).

 

I have a 242, after a little research I've determined this transfer case has an electrical switch instead of vacuum. I have ordered a replacement switch. The switch itself seems to be mounted on top of the transfer case above and inboard of the yoke for the front driveshaft. I will post on the repair.

 

Are you shifting at speed or sitting still?

 

I've cycled it through all modes including 4L, so I've shifted both moving and sitting static in neutral. When it first started, while moving I could cycle it between 4 full time and 2wd and the light would go out for a while. But even when the 4 full time light was out when I parked it, it would be back on when I started the vehicle before moving it. The full time light comes on solid if it is actually in full time, but the 4 full time light is flashing at random unless it is in 4 part time or 4 low, in which case the correct light is illuminated. The 4 full time light is also flashing in neutral.

 

Solved. The replacement switch restored functionality of the dashboard gages. The full time 4wd light is still lit when the transfer case is in neutral, intentional or not, that is not a big deal.

I had found some old posts on NAXJA on replacing the switch. They indicate the switch is located on the top of the transfer case above where the shift linkage rod goes into the side of the case. A tutorial on YouTube also shows the switch on top. On my 1988 NP242AMC transfer case it is on the rear of the case, just below the label plate, and very easily accessed. In the photos you can see the open location for the switch next to the electrical plug and the new plug installed and electrically connected.