A Thermostat works to control your room or house to a specific set point by enabling and disabling heating and cooling on the Air Handler. The Thermostat gets 24VAC from your Air Handler on the R terminal and then when it calls for say cooling the Thermostat will close a relay on the circuit board that puts that same 24VAC now on the Y1 terminal. This tells the control board on the Air Handler to run cooling. It works this way because most residential Air Handlers do not have the ability to control temperature without a Thermostat to tell it what to run.
This is why a good thermostat is very important to saving energy in your home. If you get a smart stat that can connect to Wifi many times you can get incentives from your utility company to let them control you thermostat during peak usage times. Also a smart stat can be easier to control setback temperatures to keep your Air Handler running less when your not home which is how you save money. You don't need to keep your home 72 degrees when your not there.
So in summery a Thermostat works by looking at the temp it is reading and comparing that to the set point that you have it at. Then it will switch internal relays to tell the Air handler to run ether cooling or heating. Once the set point is satisfied the Thermostat opens the relay which tells the Air Handler to stop running.
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