Translation:I can only answer simple questions.
The correct English is "I can answer only simple questions." "I can only answer" implies I can not listen, I can not reply, I can not write down, etc...I can ONLY answer. But really what you are trying to say is that you can answer only simple questions, not hard questions, not confusing questions, not convoluted questions, etc. Of course this mistake is made all the time so fine if "I can only answer simple questions." is given as the correct answer. But "I can answer only simple questions" should be marked as correct.
Reply with simple questions is grammatically correct in English. However, the meaning is absolutely different from the sentence that should be translated. When you answer simple questions, you are thinking about what the answers of the questions are, and answering them. When you reply with simple questions, you ask questions back at the person instead of giving the answers.
I can only reply with simple questions = 我只能以简单的问题回答。= I can only use simple questions to reply (literal translation)