Before lending someone money, banks must decide whether they believe the applica

Question

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. a) In this context, what is meant by the power of the test? O A. The power is the probability that the bank approves a loan that will be repaid. O B. The power is the probability that the bank denies a loan that would have been repaid. ° C. The power is the probability that the bank approves a loan that will not be repaid D. The power is the probability that the bank denies a loan that would not have been repaid.

Explanation / Answer

a) Power of a test is associated with correctly rejecting the null hypothesis.

Hence in this case,

Power represents the probability that the bank denies a loan that would not have been repaid.

Option D is correct.

b) Option C is correct.

c) Option C is correct.

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