Raheem Sterling and Joel Matip scored the goals in regulation time in what was a thrilling game at Wembley Stadium.
Pep Guardiola and Jurgen Klopp put out very strong teams, with summer signing Rodri starting in midfield for City alongside David Silva and Kevin De Bruyne.
The game got off to a frantic start, with Mohamed Salah missing a huge chance just eight minutes in after being slipped through on goal by Roberto Firmino, with the Egyptian dragging his shot wide.
And Salah was made to pay for his miss three minutes later, as Sterling opened the scoring from close range after a well-worked set-piece routine from City.
- Man Utd close to signing Mandzukic
- Ronaldo used to wear ankle weights in training
- Neymar could re-join Barcelona on loan
Leroy Sane was sadly taken off injured seconds before Sterling's strike after falling awkwardly on his knee winning the free-kick, potentially putting his move to Bayern Munich in jeopardy.
Guardiola's side continued their dominance after the goal, with Sterling going very close to adding a second, but Alisson Becker managed to get a strong hand to his close-range effort.
Salah was Liverpool's sharpest attacker, but he was guilty of missing another brilliant chance just before the half-hour mark, firing his half volley over the bar from after a mistake from Oleksandr Zinchenko.
Liverpool had the first big chance of the second half on 57 minutes, with Virgil van Dijk smashing the underside of the crossbar with a brilliant header from a corner.
Salah then hit the post seconds later after a brilliant dribble from the right as Klopp's side finally turned up at Wembley.
Sterling should have then sealed the game on the hour mark, but the City forward managed to blow a three-on-one situation and ended up falling over the ball.
Liverpool continued to probe in the latter stages of the game and found their equaliser thanks to second-half substitute Matip, with Van Dijk providing a brilliant assist after another clever free-kick routine.
Salah then had the chance to win it deep into stoppage time, but Kyle Walker produced a miraculous goal-line clearance to send the game to a penalty shootout.
Wijnaldum was the only one to miss his spot kick, with Gabriel Jesus scoring City's fifth and sealing the win for Guardiola's side - and another piece of silverware.News Now - Sport News