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The power is supplied by a transformer, and when the thermostat makes contact between the 24 volt power and one or two of the other wires, a relay back at the heating/cooling unit activates the corresponding heat/fan/cool function of the unit(s).
There are also numerous myths and misconceptions about how thermostats work and don't work, which may dissuade energy friendly operation. Take, for instance, the idea that if you set the thermostat to a lower temperature at night or when you're out, it takes more energy to warm the home back up again.