Yes, I think this is how it works.
> The [Aircraft Response Model] is a sophisticated simulation of the F-16, running at a real-time rate. "It's a fairly complicated algorithm that tracks fuel-burn, takes information from the stores management system [about weapons weight and drag], and even accounts for system processing delays," said Mark A. Skoog, USAF's AFTI F-16 test director. "Using the aircraft's current state, the ARM computes a full six-degree-of-freedom simulation during a roll to wings-level. At wings-level, [ARM switches] to a 2D-type recovery--a second-order modeling of the jet's pitch response. It calculates how much [kinetic] energy it can trade for altitude until the jet reaches a desired zoom-climb speed, then holds that speed." (http://www.f-16.net/f-16_versions_article8.html)
So the system continually computes the best trajectory for avoiding the ground, and takes over if that trajectory ever goes below the currently selected "minimum descent altitude". Pilots can adjust the MDA depending on how low they plan to fly.