Understanding the complex, multi-agent dynamics of urban traffic remains a fundamental challenge for video language models. This paper introduces Urban Dynamics VideoQA, a benchmark dataset that captures the unscripted real-world behavior of dynamic urban scenes. UDVideoQA is curated from 16 hours of traffic footage recorded at multiple city intersections under diverse traffic, weather, and lighting conditions. It employs an event-driven dynamic blur technique to ensure privacy preservation without compromising scene fidelity. Using a unified annotation pipeline, the dataset contains 28K question-answer pairs generated across 8 hours of densely annotated video, averaging one question per second. Its taxonomy follows a hierarchical reasoning level, spanning basic understanding and attribution to event reasoning, reverse reasoning, and counterfactual inference, enabling systematic evaluation of both visual grounding and causal reasoning. Comprehensive experiments benchmark 10 SOTA VideoLMs on UDVideoQA and 8 models on a complementary video question generation benchmark. Results reveal a persistent perception-reasoning gap, showing models that excel in abstract inference often fail with fundamental visual grounding. While models like Gemini Pro achieve the highest zero-shot accuracy, fine-tuning the smaller Qwen2.5-VL 7B model on UDVideoQA bridges this gap, achieving performance comparable to proprietary systems. In VideoQGen, Gemini 2.5 Pro, and Qwen3 Max generate the most relevant and complex questions, though all models exhibit limited linguistic diversity, underscoring the need for human-centric evaluation. The UDVideoQA suite, including the dataset, annotation tools, and benchmarks for both VideoQA and VideoQGen, provides a foundation for advancing robust, privacy-aware, and real-world multimodal reasoning. UDVideoQA is available at https://ud-videoqa.github.io/UD-VideoQA/UD-VideoQA/.