Step 1: Archimedes' principle.
An ice block floats in the liquid because the weight of the ice is equal to the buoyant force exerted by the displaced liquid. Since the density of the ice is less than water, the volume displaced is more than the volume of the ice.
Step 2: After melting.
When the ice melts, the volume of liquid displaced decreases, leading to a decrease in the liquid level.
Thus, the correct answer is (2).