I think it depends on file size. If you add a large file to context, I think Cursor intelligently compresses it somehow, and then the agent will “read” sections of it that it identifies as being relevant to what it is doing.
@liquefy the full folder context setting is for when you want to add a whole folder not just a single file. When turned on it would take in the whole folder until it reaches context limit.
@romil8jain the Agent reads relevant parts of file and adds more when needed. It might not need the whole file and with Codebase Indexing it would know if it has the relevant parts.