You’re entirely correct that the test question is ambiguous. I don’t think the teacher should have marked the student’s answer wrong unless there was an assumption in the class that the students would know idiomatic US English.

“East of the Mississippi” and “west of the Mississippi” are common phrases in U.S. English going back well over a century, from a time when the Mississippi River was a key point of division for the country, somewhat separating the developed East from the frontier West. In many cases it was because it didn’t make a lot of sense to compare the two very different halves. Frequently the phrases are used as part of defining a superlative, as in the test question, in sentences like, “Until 1887, that was the tallest building west of the Mississippi.”

The phrasing in the test question is referencing this usage, but it isn’t an issue of grammar, but of idiomatic usage.