Why geologist do not consider molten iron in the magma to be the source of Earth's magnetic field? This was a question that came in a exam. How come  is this  possible?
Actually, a question on the source of Earth's magnetic field was asked here on physics SE, which matches my opinion.

The source of Earth's magnetic field is the molten iron and metals in the earth's core. The spinning of these liquid metals produces the same effect as electric current in a coil which produces a magnetic field.

Yes, that is true. Circulating ions of iron and nickel in a highly conducting liquid of Earth's core forms current loops and produces a magnetic field.
There is something to do with geologist though I'm not getting it. How come geologist doesn't seem to agree with this?
 A: 
Dynamo Effect :
The dynamo effect is a geophysical theory that explains the origin of the Earth's main magnetic field in terms of a self-exciting (or self-sustaining) dynamo. In this dynamo mechanism, fluid motion in the Earth's outer core moves conducting material (liquid iron) across an already existing, weak magnetic field and generates an electric current. (Heat from radioactive decay in the core is thought to induce the convective motion.) The electric current, in turn, produces a magnetic field that also interacts with the fluid motion to create a secondary magnetic field. Together, the two fields are stronger than the original and lie essentially along the axis of the Earth's rotation.

Italics mine.

The Earth and most of the planets in the Solar System, as well as the Sun and other stars, all generate magnetic fields through the motion of highly conductive fluids. The Earth's field originates in its core. This is a region of iron alloys extending to about 3400 km (the radius of the Earth is 6370 km). It is divided into a solid inner core, with a radius of 1220 km, and a liquid outer core.

The liquid iron, as the other answer states , cannot have a permanent field.
There may be a mechanism by which the solid core may have a weak magnetic field. An initial magnetic field is needed for the dynamo model to work:

Given a magnetic field, a dynamo can make it grow, but it needs a "seed" field to get it started.
For the Earth, this could have been an external magnetic field. Early in its history the Sun went through a T-Tauri phase in which the solar wind would have had a magnetic field orders of magnitude larger than the present solar wind. However, much of the field may have been screened out by the Earth's mantle.
An alternative source is currents in the core-mantle boundary driven by chemical reactions or variations in thermal or electric conductivity. Such effects may still provide a small bias that are part of the boundary conditions for the geodynamo.

......

The motion of the fluid is sustained by convection, motion driven by buoyancy. The temperature increases towards the center of the Earth, and the higher temperature of the fluid lower down makes it buoyant. This buoyancy is enhanced by chemical separation: As the core cools, some of the molten iron solidifies and is plated to the inner core. In the process, lighter elements are left behind in the fluid, making it lighter. This is called compositional convection. A Coriolis effect, caused by the overall planetary rotation, tends to organize the flow into rolls aligned along the north-south polar axis.



A schematic illustrating the relationship between motion of conducting fluid, organized into rolls by the Coriolis force, and the magnetic field the motion generates.

The dynamo model is still a subject of research.
Maybe you have misunderstood the question, or it was badly stated in the exam. Maybe the stress was on permanent magnetism? 
A: The magma has temperature between 700 and 1300 Celsius degrees. The Curie temperature of iron is at 770 degrees Celsius. Above that temperature, iron loses magnetism. Note that right above 770 °C, iron is still solid because the melting point is around 1500 °C.
So magma almost never can be magnetic because it's just too hot for that. Incidentally, if it gets melted and then refreezes, it typically doesn't regain magnetism. The situation is even clearer for Earth's core whose temperature is 6000 °C or so. There can't be any magnetism for iron and nickel that is this hot.
Geomagnetism is driven by the dynamo effect which is a loop of magnetic loops creating currents and vice versa that is partly being sustained by radioactivity.
A: I agree with Lubos Motl's answer. Geologist indeed consider the magnetic property of molten iron i.e. paramagnetism and ferromagnetism.
Iron is a ferromagnetic material. It has a greater degree of magnetism when compared to dia- or paramagnetic material. Now, there is a temperature called Curie's temperature when a ferromagnetic material changes to a paramagnetic material. The Curie's temperature for iron is 1043 K. Earth's core has a temperature of 6000 °C. Clearly, iron in the Earth's core is in paramagnetic state and is not as magnetic as it was in ferromagnetic state. Now, for paramagnetic material, susceptibility is inversely proportional to temperature.
$$\mathrm{\chi_m \propto \frac{1}{T}}$$  
This is because when the temperature is raised, the atomic dipoles acquire some kinetic energy. This tend to disorient the dipoles and magnetic susceptibility decreases with rise in temperature.
But, Magnetic field still persists(0.25 to 0.65 gauss). This is due to dynamo effect as mentioned in anna v's answer. It is for this reason magnetic field of Earth is feeble.
A: The earth is receiving massives amounts of electric energy from the sun and respoding to that energy creating light, heat, more electric phenomena and so. Its quite simple if you think the sun as a giant transformer that gets some type of energy fron its environment and send it to us.
A: Earth was hypothesized to have an iron core solely because it was needed to explain the strong magnetism of the earth. Now that we realize that molten iron isn't magnetic, I think the composition of the center of the earth needs to be re visioned in a way that might not include iron as the cause of the magnetism. 
The Electric Universe theory, which is gaining a lot of traction, would suggest plasma being a strong source of electro-magnetism. 
that said, until we actually finds a better way to probe the center of the Earth, it's going to be a hard nut to crack but I don't see that iron is the magnetic source of the earth      
A: Iron is being created by the FUSSION process at the Earth's core, and being ejected as it is less dense than the Liquid Metallic Hydrogen Core.  Solid Iron would NEVER EXIST at the core's temperature nor at the Earths Core Pressure values.
