The purpose of a Cloze test, as cited in this wiki link is "to understand context and vocabulary in order to identify the correct words or type of words that belong in the deleted passages of a text."
In the example which you have posted, the context requires the broadest category, i.e., living, in order to make sense.
You obviously understand the categories working and sleeping to be too limited. Perhaps the category walking appeals to you because of the immediate hyphened adjective, two-legged. But it cannot work here because there might be (and are) other two-legged creatures who not only walk but also fly (not to mention, swim).
Without any limiting criteria provided in the given context that would in turn demand a more limiting answer, the broadest category, living, is the only logical answer.
Student or Learner