This paper deals with the small-signal analysis of islanded AC microgrids, considering the coexistence of voltage-controlled converters (VCC) operating under droop control law and current-controlled converters (CCC) operating as multifunctional inverters. Thus, the CCCs can deliver power from a non-dispatchable energy source and, depending on the operation mode, they can perform the active filtering function (AFF), which consists of injecting the harmonic currents associated with the local non-linear loads (NLL) resulting in a microgrid power quality (PQ) improvement. However, the transient characteristics following a local NLL step highly depend on the CCC operation mode. When AFF is disabled, the CCC output is almost not affected by the local NLL step. Instead, the harmonic extraction algorithm dynamics affect the CCC output when AFF is enabled. As a result, the overall system dynamic behavior is significantly affected, since microgrids are low-inertia and small power systems. A generic small-signal model is derived to study these effects, and its accuracy is then validated through simulated and experimental results. It was found through time-domain and frequency-domain sensitivity analyses that the AFF significantly affects the CCC PLL and the dynamic interactions between the microgrid network and the inverter's internal control loops.