A contraction, in the English language, is when two words are put together using an apostrophe. For example, they'll is a combination of they will. Usually contractions use the full first word and the end of the second word, like it's, they're, we're, etc.
However, in this case the answer would be they're, or they are. The sentence without the contraction is stating that the speaker sees that they are in the library.
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