The second part (distinction about reflecting light) is vital to our understanding of our moon and therefore all moons.
Students should already be familiar with other forms of objects that orbit Earth such as artificial satellites, these they would be aware of, but not be able to see or recognize in the sky with their naked eyes.
- At that age level, because these satellites look no different to stars in most cases, if/when they see them, they will assume that they are stars, reinforcing that you cannot see these artificial satellites.
So they are aware that there are many satellites, but not all satellites are moons. Students can only visually identify one of Earth's satellites (our moon), and would reasonably offer that the only reason we can see it is because it is reflecting the light of the sun.
Students at this level will be aware that the Sun (Sol) is itself a Star, and that the only reason the sun looks so big to us compared to other stars is due to our close proximity to it.
The reason that emission vs reflection of light is important is that of the visible bodies in our sky, only stars (including our Sun) produce or emit light and only moons reflect that light.
- Reflection of light is perhaps the most important aspect of the moon that they would have covered in the syllabus so far, it is the requisite understanding to explain the phases of the moon as well as the most intriguing aspect, eclipses of the moon and sun. It is reasonable to assume that there would have been a lot of discussion about reflection versus emission of light, especially when trying to explain the difference between a solar and lunar eclipse.
If such discussions have not been held prior to the exam, I would suggest that the delivery of the curriculum prior to the exam was not sufficient, especially as the general model and broad definitions should have been clearly outlined to educators before the syllabus was prepared.
For lower levels I would still expect them to be aware of this but might not put it in the exam. For 5th grade, this is a great entrance exam question because it would properly gauge the depth of understanding at the start of the year, by the end I would absolutely expect students to understand the concept of the moon reflecting light and use it when defining what a moon is. Think about it, if you ignore the gravitational effects on the Earth, before 4th/fifth grade, all our moon does is reflect light.
In other answers there is talk about a distinction between natural and artificial. For the year level, it is acceptable to omit natural from the definition of satellite as apart from Earth and our influence on the Solar system, so far all identified satellites are naturally occurring.
It is also acceptable to use the phrase satellite of a planet in place of the more technically correct astronomical body that orbits a planet as those concepts are probably a bit too abstract at that level.