Not 100% sure but i think this setting has been removed as it doesn't really serve a purpose anymore. Even a (seemingly) static link can lead to dynamic content.
Checking for fileextensions also does not help, i can easily create a .htaccess redirect that will turn a static link (
www.site.com/image.jpg) to redirect to a php-script.
PS Search the 3.7 forums (and the bug tracker) on vB.com for 'Dynamic' and you will find a few posts where this is explained/discussed.