How do we test Dynamic Type (text size) in an iOS Simulator?

The Accessibility Inspector (Xcode/Open Developer Tools/Accessibility Inspector in Xcode 8) as mentioned here is a great tool for testing Dynamic Fonts and accessibility in general. The WWDC 2016 video on is is well worth a watch.

Xcode 9.0 onwards

You can resize font of simulator as -

Xcode ► Open developer tool ► Open accessibility inspector
Select simulator from dropdown after that click setting(Gear) icon.

In the simulator, go into settings (Choose "Home" on the hardware menu). Then General->Accessibility->Larger text. You also should slide the switch at the top to "Larger Accessibility Sizes". You'll then get a slider to adjust the text size. Hope this helps.

If you prefer an automatic approach to set this, see this question: How to test Dynamic Type (larger font sizes) in iOS Simulator