Remove the Downloads removes the corresponding album, so I'm not inclined to find out if Delete from Library does the same thing.
Why wouldn't they call it "Delete Playlist"? And why does Remove the Downloads remove the underlying album, instead of the correct behavior, which is to remove the playlist from my phone but keep it in the cloud and my other devices?
That depends on what you've chosen for the setting related to that. If you 'Add songs to library when adding playlist,' then no, the songs/albums remain. Otherwise, the playlist is your only view to that music, and so removing it removes your only view.
I believe the default is not to add songs to your library when adding a playlist, so deleting the playlist removes your view.
Why wouldn't they call it "Delete Playlist"? And why does Remove the Downloads remove the underlying album, instead of the correct behavior, which is to remove the playlist from my phone but keep it in the cloud and my other devices?
This is bad no matter how you gloss it.