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I'm running vagrant with virtualbox on ubuntu 12.04. When the VM isn't running, the system's memory usage is around 2 GB. I've set swappiness at 10% and the VM's memory at 1 GB. When I fire up the VM, strangely, memory usage drops to 1.5GB and I encounter frequent short freezes(because the memory compresses itself?).

Why does this happen?

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How much memory do you have on the Host OS? Without this info we can't be sure, but from what you're describing, I would say this is because large chunks are being paged out of RAM to the Swapfile.

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