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.
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?