My Golem was up against a Milotic, which could use Hydro Pump, - Would there then be just a little bit higher chance, that Milotic would use Hydro Pump, than another useless move?
Can a NPC trainer think with artificial intelligence, or do they just use random moves?
Yes they do. All trainers have AI but no wild Pokemon does.
-In easy mode there would be a smaller chance of it using hydro pump
-in regular mode there would be a pretty high chance that it would use hydro pump
-in challenge mode it would be almost definite that it would use hydro pump
-I found this while reading the site above. It does not directly state that they have AI but, according to this site challenge mode increases AI of trainers and easy mode drops AI of trainers so if there is a change in AI there has to be an initial AI.