To properly examine the effect of a categorical independent variable in a multiple linear regression model we use an interaction term.

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Interaction terms are used to examine if the effect of one independent variable on the dependent variable changes at different levels of another independent variable. To properly examine the effect of a categorical independent variable in a multiple linear regression model, we typically use dummy coding (or one-hot encoding) to convert the categorical variable into numerical form, not necessarily an interaction term.

To Properly Examine the Effect of a Categorical Independent Variable