The "Wrap text automatically" setting appears to control only that: whether text beyond the right edge of a cell continues on the same line (the default) or is wrapped to a new line - and not whether any such new lines affect the row height. If you have set a specific height for the row, this is maintained irrespective of the contents; only if you have not done this will the row height adjust automatically if new lines are created in a cell, either manually or automatically.
If your row height is not responding to changes in the cell contents, you must have set a specific row height, I think. You can reset this by double-clicking the divider below the row header for that row. (You can do this for multiple rows by selecting them and double-clicking any divider.) Yes: that's a manual act rather than the automatic effect you are seeking, but once you have done it, the row will respond automatically to future changes - as you wish. If instead you drag the lower row edge to expand a cell manually, you will be setting a row height and spoiling the effect you desire.
I trust this helps.
Brian Barker