Now you might be asking, why would it execute within the same transaction if the propagation is REQUIRES_NEW? Wouldn't it create a new transaction? Normally yes, however, In this case, the update2() method is being called in the same class as the first update(), making it an internal call. When the first update method was called the @Transactional annotation passed the method execution to the interceptor, which created a proxy for the transaction (Spring AOP). When the Internal call to the second update2() method was executed, it couldn't be intercepted by a new interceptor, therefore, it couldn't create its own transactional proxy, which means it cannot create a new transaction. If you don't understand this concept right away, don't worry. I had to review the video several times and I'm still trying to wrap my head around it.

UPDATE: I went though the VMWare Spring Framework Essentials lecture video where they used this exact example. The answer is indeed D. Feel to stupid for my original post. Apologies for the confusion.