Who are the new ministers?
There are two new ministers, both from Lieberman's far-right Yisrael Beitenu party. He will take over as defence minister -- considered by many in Israel the second-highest role in the government. Lieberman, who lives in a settlement in the occupied West Bank, was previously foreign minister until 2015.
Another member of Lieberman's coalition, Sofa Landver, is expected to become the minister for absorption, a position which helps new predominantly Jewish migrants from around the world adjust to life in the state. She also previously held the position until 2015.
How does it affect Netanyahu's coalition?
Even before Wednesday's changes, many in Israel dubbed Netanyahu's government the most rightwing in the country's history, with religious nationalists from the Jewish Home party holding key cabinet positions. With the addition of Yisrael Beitenu, that title seems in little doubt.
Lieberman, who will be responsible for administering policy in the occupied Palestinian territories, has said he supports the death penalty for perpetrators of anti-Israeli attacks.
Netanyahu had previously tried to bring the leftwing opposition into a unity government, but in the end negotiations broke down.
What is in the agreement?
The agreement guarantees that the chairman of Yisrael Beitenu will be defence minister, while another party member will be absorption minister.
Signup to our newsletter and follow us on Facebook and Twitter!
While most of the media attention was on the political implications, parts of the agreement were also economic.
Lieberman secured 1.4 billion Israeli shekels ($3.6 billion/3.2 billion euros) over four years in pensions for elderly Israelis, as well as 150 million shekels ($39 million/35 million euros) to rehabilitate neighbourhoods and expand public housing.
Lieberman, born in the ex-Soviet republic of Moldova, sought the pensions arrangement to benefit immigrants from the former Soviet Union, his main electoral support base.
Other clauses include support for more extensive voting rights for Israelis living abroad and backing for bi-annual budgets.
He had also pushed for the government to institute the death penalty for Palestinian "terrorists," but backed away from the demand in the talks.
A watered-down version was agreed upon that analysts say is unlikely to significantly change current policy. There have been no executions in Israel since 1962.
How does it affect parliament?
Netanyahu has been seeking to expand his coalition since last year's general election, when he formed a government with just 61 seats in the 120-seat parliament.
His party, the Likud, brought 30 seats, with four smaller parties making up the rest.
Such a small majority left him at the mercy of his MPs, with even the smallest rebellion threatening the passage of a bill.
The addition of Yisrael Beitenu gives Netanyahu an extra five seats.