Inside and outside picking
This exercise is all about changing strings while alternate picking! The two important terms here are of course inside and outside picking.
Outside picking happens when you change to a higher string after a downstroke, or to a lower string after an upstroke. It's quite easy to imagine that if you were only to play these two notes on the stings your pick would be doing this kind of motion (if you're going from the D to the G string and vice versa):
Inside picking is just the opposite of that! This happens when going to a lower string after a downstroke or to a higher string after an upstroke. Here's a nice picture so you'll see what I mean: