what would be the best way to make this activity: Identify the sections in this photo (word bank and multiple options)

Drop down lists look more elegant, to me, but they require a lot of triggers, so they take a lot of work, and there is nothing in SL that will help you.

The disadvantage of DnD is that it is harder to make them compliant, and they are difficult for learners using phones or tablets.

On a positive note, regardless of which you choose, you need make only one, and copy it to all the others.

Either way, you would start with the exact picture you showed. Make the blanks all the same size to avoid giving unintentional clues.

If you are doing a DnD, put each word in the word bank in its own text box, and make it a drag item, with the boxes as targets. If you give each word a distinct Drop Correct, and Drop Incorrect, it will show which ones are right and wrong.

Does this need to be graded?