Act in good faith means to act honestly, sincerely, and with fair intention. The correct answer is this meaning because the expression is used figuratively, not only by its literal words.

Examples:

• Both sides promised to act in good faith during the talks.
• In an HSC essay, Act in good faith can express this meaning: to act honestly, sincerely, and with fair intention.
• When this expression appears in a passage, connect Act in good faith with the idea of to act honestly, sincerely, and with fair intention.