Inside the temp sender is a device called a Thermistor.
It is a temperature variable resistor and changes its resistance with change in temperature.
In ice water(32degrees F/ 0 degrees C) it will have one resistance and in boiling water(212 degrees F/ 100 degrees C) it will have another. One being higher and the other lower, not sure which.
You can measure it with an Ohm meter between the base and terminal on older units, or between the two terminals on the newer units.
Just clip your meter leads onto it and put the metal part into the water. You will see the resistance value change as it reads the temperature of the water.
You should see a linear slope on the resistance change between the ice water and boiling water. If at any point it goes to 0 Ohms(shorted) or infinite ohms(open) the thermistor is damaged or the contacts are broken to it.
You can test it in the engine block without going through the ice water test by testing it when the block is cool and then again when it's hot to see if there's a change in resistance.
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