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 iron shavings, the magnetic force attracts the shavings, causing them to move toward the magnet. This attraction increases the ordered arrangement of the magnetic material and thus results in a conversion of kinetic energy (from the movement of the magnet and the shavings) into other forms (like potential energy due to attraction). Consequently, the net kinetic energy of the system decreases as the iron shavings are drawn in and become less kinetic in motion relative to their initial state.