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The coolant temperature sensor is a variable resistor that is influenced by temperature. Which means, as the temperature changes, so does the resistance inside the sensor. The computer reads this change in resistance to determine the operating temperature of the engine. It uses this reading to determine proper air/fuel mixture and ignition timing settings.
See Figures 1 and 2
This test can also be performed with the sensor still installed in the motor, provided the engine is at the same temperatures as given for the specifications.