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This study examines how preservice teachers (PSTs) apply knowledge of differentiated literacy instruction to evaluate AI-generated formative assessments. Conducted in a differentiated literacy instruction course, the research involved PSTs prompting ChatGPT to create assessments for students at varying comprehension levels. Data, including participants’ evaluations, modifications, and reflections on AI-generated assessments, were analyzed using qualitative coding methods. Findings indicate a preference for process differentiation and for composition-based assessments over performance-based alternatives, reinforcing traditional literacy assessment formats.