As to what yarn to use, anything appropriate for a baby blanket. To me, that means easily washable so probalby an acrylic or cotton blend. 100% cotton can be heavy, so may not be what you want to use. Some of the ones at Ravelry that are done stripped or in verigated yarns look really nice.
Are you having trouble understanding parts of the directions? I know that EZ patterns are often written more in general terms then specific row by row instructions. I don't have the book with that pattern. You can type out the sentence or two that you're having trouble with, I'm sure someone will be able to help interpret it.