Before lending someone money banks must decide whether they
Last updated: 12/11/2023
Before lending someone money banks must decide whether they believe the applicant will repay the loan One strategy used is a point system Loan officers assess information about the applicant totaling points they award for the person s income level credit history current debt burden and so on The higher the point total the more convinced the bank is that it s safe to make the loan Any applicant with a lower point total than a certain cutoff score is denied a loan Think of this decision as a hypothesis test Since the bank makes its profit from the interest collected on repaid loans their null hypothesis is that the applicant will repay the loan and therefore should get the money Only if the person s score falls below the minimum cutoff will the bank reject the null and deny the loan Complete parts a through c below C a In this context what is meant by the power of the test OA The power is the probability that the bank approves a loan that will be repaid OB The power is the probability that the bank denies a loan that would have been repaid OC The power is the probability that the bank approves a loan that will not be repaid OD The power is the probability that the bank denies a loan that would not have been repaid b What could the bank do to increase the power OA The bank could raise the cutoff score OB The bank could lower the cutoff score OC The bank could scrap the point system OD The bank could hire additional loan officers to assess each applicant s information c What is the disadvantage of taking the action in part b OA A larger number of trustworthy people would be denied credit and the bank would miss the opportunity to collect interest on those loans OB The bank would have to spend more money on the additional loan officers OC The bank would have to spend additional time and money developing a new system OD A larger number of untrustworthy people would have their loans approved and the bank would lose money from those unpaid loans Next