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To test payments with Paypal, you will need to set PayPal to Sandbox mode in HBook->Payments. When the Sandbox is used, it process fake payments with a fake Paypal store.
Sandbox API credentials are to be entered as you can not use the same API Credentials (Username, Password and Signature) for Live and Sandbox payments.
To optain Sandbox API, you need to create a Sandbox account. It is free and can be done at developer.paypal.com.
Learn more about test accounts with Paypal here.