Business Analyst Domain Expertise

Yes, of course. Also if it is BSA position, the candidate also needs to know the technology in addition to domain expertise.

The answer is NO, because every BA had to have started somewhere!
The best way to answer this question..is questioning how well you can adapt and your research and understanding ability...remember, this is an interview process...the decesion is made on your best ability to answer the question..so when this is asked and you do not have a specific domain experience, talk about your "fast learner" and possessing the skills of ADAPTATION to the limit.

Frankly speaking getting domain expertise while working being part of any live project is a painful excerise as most of the time B.A won't be getting much time to START from the scratch in terms of learning in front of client. Better would be to have some fair amount of domain knowledge from the selective books available in the market. YES it is true that you can gain bit of domain knowledge from the books and through google.

I think it will be a competative advantage for that person if he has some domain expertise to start with BA Role. Otherwise it is a tough job for him to perform BA Role.

You have not stated if you are referring to business domain or technical domain. Surely you have some expertise in one of these domains.