Step 1: Understanding the Concept
The question describes a system of government where legislative power is divided between a central authority and constituent political units (like states or provinces). We need to identify the correct term for this system.
Step 2: Defining the Systems of Government
(A) Unitary system: In a unitary system, all governing power resides in a single, central government. Any powers held by regional or local governments are delegated by the central government and can be withdrawn. There is no constitutional division of powers. (e.g., United Kingdom, France).
(B) Federal system: A federal system is characterized by a constitutional division of powers between the central (federal) government and the state (or provincial) governments. Both levels of government are sovereign in their respective spheres. The description in the question perfectly matches the definition of federalism. (e.g., USA, Canada, India).
(C) Bicameral system: This refers to a legislature with two houses or chambers (like the Lok Sabha and Rajya Sabha in India). It describes the structure of the legislature, not the relationship between the Centre and States. A country can be federal and bicameral, or unitary and bicameral.
(D) Limited system of democracy: This is a vague term, not a standard classification for the distribution of powers between levels of government.
Step 3: Final Answer
The system of government that distributes law-making power between the Centre and the States is known as a federal system. Therefore, option (B) is the correct answer.