When taking self-report personality tests, people may exaggerate their positive personality traits (such as generosity). What is this an example of?

Social Desirability.

Explanation:

Social Desirability can be defined as a defensive tendency to give self-description as a "positive". The respondents give such answers so that they can be socially accepted. In this response process, the respondents avoid negative and socially undesirable self-description.

Such responses becomes a hindrance in the time of evaluation of study or research, especially when studying sensitive issues.

So, the correct answer is social desirability.