Step 1: Understanding the Concept
Oxygen and carbon dioxide are exchanged between alveolar air and blood by simple diffusion.
Step 2: Structure needed
Diffusion is fastest across the thinnest possible barrier, so the wall is a single layer of thin, flat cells.
Step 3: Type of epithelium
This is simple squamous epithelium resting on a thin basement membrane.
Final Answer:
The alveolar wall is made of squamous epithelium.
\[ \boxed{\text{(B) }\text{Squamous}} \]