Don't assume good faith.
It has no connection whatsoever with the "South".
In general, I think asking for clarification is better than being condescending.
I spent a fair amount of time researching this urban legend earlier today. I wasn't "assuming" anything.
But to make clear what I was saying, I really should have responded to the parent, who says: "It's extremely hard to believe that even a malicious scientist could convince himself that a horse cannot be ridden into town."
My point being that a malicious test-giver could certainly deny that as a valid answer. I don't know that I believe that anecdote happened, but it is assuming good faith to think that it couldn't happen because no one would ever reject "horse" as an answer.
Until someone provides an actual citation to a first-hand witness, I'm going to go ahead and call this myth busted.
The closest I've been able to find is a claim (without references of any kind) in Gould's The Mismeasure of Man, where the actual question involved a man "walking without his feet touching the ground". Clearly "bicycle" is a better answer for that question than "horse" (because your feet move in a quasi-walking motion when you're riding a bike, but not when you're riding a horse).
The "yelling" part appears to have been invented out of whole cloth. Also, I'm not sure where the notion that Native Americans were unfamiliar with wheeled conveyances in the 1920s came from.