Should admission test standards be higher than the caliber of students already studying, lower or approximately balanced? Why?

The answer depends on what type of student you're trying to recruit into your program.  If you're trying to raise the standard of student, you use a higher test standard than you currently have to get in a higher caliber of student,  This may mean you gain a lower number of students as fewer will qualify for admission.

if you are satisfied with the academic range of students in your program, you keep the standards where they are. 

The main reason to lower the admission standards would be to bring in more students, knowing that you will be adding students to the lower end of your academic spectrum. 

As an example, if you typically bring in100 students,25 will be on the higher side of the scale,50 in the middle, and25 on the lower end of the scale.  With an increase in standard, you lose the bottom25 students who would not qualify, but your average student is of a higher academic quality and the success rate increases.  if you lower the standard, you get the100 plus however many more that would not have qualified under the standard admission criteria, say50 additional students.  You now have150 students qualified for admission, but your average student is now of a lower level academically.  Depending on the type of program, the success and retention rate would likely drop with the greater number of students in the program having a lower academic score upon entering, equating to a lower chance of success in their studies.