The correct response is:
Kinetic energy decreases because iron shavings move in the direction of magnetic force.
When the horseshoe magnet is moved toward the pile of iron shavings, the magnetic force attracts the shavings to the ends of the magnet. As the iron shavings are pulled in by the magnetic force, they gain kinetic energy, but the overall kinetic energy of the system decreases because some of the kinetic energy of the magnet is converted into potential energy as it is doing work against the magnetic field. In essence, the shavings speed up and move toward the magnet, but the net effect is a decrease in the kinetic energy of the entire system as energy is transferred.