Activation of character's effects (RE: DBG)
From the ruleboook (source), page 10:


  LEVEL UP!When a Character has received a certain amount (or more) of the indicated Decorations, that Character “levels up”, giving you access to more powerful effects to aid you in your escape. When a Character becomes Level 2, that Character has all of the abilities of Level 1 as well as Level 2.


So yes, when a charachter becomes level 2 they can use all abilities of level 1 and level 2.