What you Need
What to do
Add the the yeast and the sugar to the lemonade bottle
What may happen
You should find that the mixture becomes frothy, and the balloon inflates.
Why does it happen?
Yeast is a microscopic form of fungus, it is related to mushrooms. Like us it will eat sugars and react them with oxygen from the air to form water and carbon di-oxide.
However this wouldn't explain the increase in volume of the gas in the bottle. This is because if you react a sugar such as Glucose (C6H12O6) with oxygen (O2) you form as much carbon dioxide as the oxygen you started with:
C6H12O6 + 6O2 -> 6H2O + 6CO2
The CO2 produced will be the same volume as the O2 taken in, so there would be no increase in volume and the balloon would not inflate.
However yeast has another trick up its sleave. If there is lots of food about in the form of sugar but not enough oxygen, the yeast can generate energy by breaking down the sugar into ethanol (alcohol) and carbon dioxide:
C6H12O6 -> 2 C2H5OH + 2CO2
This is a big advantage to the yeast because it means it can thrive in many environments it wouldn't otherwise do so, such as in your bottle. There is not much oxygen in the air above the bottle and even less in the water so the yeast breaks the sugar straight down to alcohol and carbon-dioxide. This forms extra gas (if no gas is taken in, but gas is produced, the volume will increase) and inflates the balloon.
What has this got to do with bread?
A receipe for bread includes both sugar and yeast. The yeast will eat the sugar and produce alcohol and carbon-dioxide. The CO2 forms as bubbles in the bread mix making the bread rise - making the bread much lighter and easier to eat.
Is bread alcoholic then?
When it is cooked most of the alcohol evaporates, so you wouldn't be able to get drunk on bread!
Why is the liquid sometimes fizzy?
A fizzy drink is just a normal drink with carbon-dioxide dissolved in it, so when the yeast produces lots of carbon-dioxide some of it dissolves in the drink making it fizzy. This is the reason that traditional ginger beer becomes fizzy - you make it with some yeast and sugar, the yeast ferments the sugar into a small amount of alcohol and carbon-dioxide. Champagne is fizzy for the same reason, it is fermented a second time with some added mollasses and yeast inside the bottle, making carbon-dioxide and so the bubbles.