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Yes. It's a Quartus-specific mechanism to point to a directory that has a lot of your files in it without explicitly adding each one. I prefer explicitly adding them, but is meant to make things easier.
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Actually, Quartus does not pick up any VHDL files that are not explicity in the file list.
The libraries section is just a legacy thing to support AHDL.
The libraries section in the settings has nothing to do with VHDL libraries.
Basically, unless you are using AHDL, the libraries section is pretty useless.
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