Example 1 is correct. Begin the first quoted paragraph with a quotation mark. Each succeeding paragraph in the same quotation is begun with another quotation mark. At the end of the final paragraph, close the quotation marks.
Note that when quoting a multi-paragraphed passage, all lines should be indented from the left margin (more so than for the main body of the paper). This is an additional aid to making the extent of the quotation clear.
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