You start off by purely reading but each time you play the same exercise you memorise it little by little until, if you play it often enough, you'll have memorised it completely. That's usually what you want to do anyway. If it's an actual piece of music that you want to play well, you should memorise it for best results. That's why classical guitarists play concerts without reading from music. (On the rare occasion that they do, it's usually a sign that they haven't memorised the piece well enough in time for the concert.)
If you're playing exercises for the purposes of improving your sight reading ability then you should avoid memorising by constantly playing fresh material. As soon as it's even partly memorised you're no longer reading it and that particular exercise will have outlived its usefulness as a sight reading exercise.
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