To the left is an image of the device manager from a not upgraded Virtual machine, it shows an unknown device, to the right is an upgraded machine, and here it shows the Virtual Dynamic Memory Driver under system Devices. this driver is responsible for the possibility to balloon memory. The whitepaper says the following on ballooning:
In order to be able to dynamically remove memory from a virtual machine, Dynamic Memory employs a process called ballooning. Ballooning works by having the virtual machine and the host agree that certain memory pages will no longer be accessible by the guest.
Should the virtual machine later request additional memory from the host, memory pages that were previously ballooned will be unballooned as needed until all ballooned pages have been returned to the guest. Should the guest continue to request additional memory after this, Dynamic Memory allocates more memory to the virtual machine.
The task manager will keep showing the amount of memory available to the Guest OS before the amount of available (physical) memory is removed, thus not breaking any application that is depending on these numbers.