Type1 vs Type II

Will a type two engine and transaxle fit into an IM?

I think so; trannies and Type II engines are readily interchangeable and on the case of the Type II engines almost the same thing except for the crossmember that supports the engine (by the oil pump) to the chassis/body of the bus.

Ralph, there is no type 2 engine per se.
Type 2 refers to the VW van or bus, type 2's were equipped with type 1 & type 4 engines - VW of Brazil still makes a type 2 van with a type 1 engine - see attached picture.
Both T1 & T4 engine/transaxles will fit into a IM, as well as a 6 cyl 911 engine.

I may be mistaken but, doesn't the type 2 transaxle include some sort of gear reduction device? I think that it is on the ends of the axles and in part is what gives the combi a higher ground clearance.

Buses used the reduction gears up thru '67 --- so a '68 up would not have them. Doubt you'd want to use a '67 back vintage one. For a light Speedster the '68 up would probably have the wrong gearing --- probably better used in an off road dune buggy.

'72 up used the 1.7, 1.8 & 2.0L TIV (T4) engine that was in the VW 411/412 and the Porsche 914.

Wolfgang's right on the gearing....

Although if you want to pull stumps with your IM, that would be the transmission I would choose for that looooowww first gear...