Hi @lechon, thanks for your question.
Application passwords can usually be created and managed in the WordPress > Users > Profile page. If you toggle the Wordfence > All Options > Disable WordPress application passwords checkbox and hit SAVE, you will see the feature appear/disappear on the profile page. That is the most basic check.
You could always go one step further and create an application password, make a note of it, then disable them in Wordfence. Afterwards, attempt to connect an application that uses the REST API or XML-RPC using this password. The expected behaviour would be for the application to fail when connecting rather than succeeding despite the application password itself being a valid one.
There’s more information on how WordPress uses application passwords (mostly focused on application development, but there is an overview on how they work) here: https://make.www.ads-software.com/core/2020/11/05/application-passwords-integration-guide/
Thanks,
Peter.