Simulating Nios II in ModelSim - problems with memtest

Interesting. So the jtag_uart module apparently loads input values from a .dat file in the sim directory:

Embedded Peripherals IP User Guide:

Simulated Input Character Stream
You can enter a character stream that will be simulated entering the read FIFO upon simulated system reset.  The MegaWizard Interface accepts an arbitrary character string, which is later incorporated into the test bench.  After reset, this character string is pre-initialized in the read FIFO, giving the appearance that an external JTAG terminal program is sending a character stream to the JTAG UART core.

So does that mean the simulation model will not accept input from the keyboard?

If the contents of the .dat file is read in after reset, you can't really simulate the user inputs to the queries by the memory test software.