You're familiar with M1 where you probably have monthly exams that make up your grades as well as a few other things. In M3, as you probably know, you are contributing to patient care as the lowest member on the totem pole of a medical team. You will rotate through all major specialties of medicine. Your duties will consist of assuming responsibility for 1-3 patients by knowing all the details about their health, taking their histories/examining them, documenting that, and then taking a stab at the management of said patients with final input from your upper levels. Based on your performance, you are given a subjective evaluation by the attendings +/- residents. Then at the end of your rotation, you are given a "shelf exam" which is an NBME Subject exam for that field (ex. Pediatrics, etc.). There are practice ones available online and they loosely correlate to what you see in the USMLE World Step 2 CK Question Bank that you will have undoubtedly have bought. Ultimately, your clinical grades in these specialties (Honors, High Pass, Pass, Fail) is some combo of the evaluations and your shelf score.
Some attempt a pragmatic approach and dichotomize things by trying their hardest to appease residents/attendings during their clinical work and then spend their time outside of clinical rotations doing UWorld questions. Each student's approach is different depending on their goals, strengths, and it also heavily depends on the way the grading system is set up at each school. Often within a school, different specialty rotations have different syllabi so honors is attainable without a high shelf score vice versa.
In summary, students spend the time on the wards developing their clinical reasoning skills through doing clinical work. When they come home, they either dedicate more time to topics they learnt that day or prepare for the shelf by doing question banks. Some also read review books like "Case Files" which can provide an overview into various diseases and their management. The most stressful thing about it is that you don't have as much control over the process as you'd think. Clinical evaluations are ultimately subjective and your shelf scores are about how good of a test taker you are than how much you studied. At the same time I'm not encouraging a nihilistic approach as learning the clinical reasoning and disease management for the specialties is important to success.
Here's a really good guide that hopefully you can look at when this becomes more of a focus for you:
FindersFee5's guide to clinical rotations
