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 shavings experience a magnetic force that attracts them towards the magnet. As they are attracted and move, the kinetic energy of the shavings (and the system overall) decreases because they are being pulled toward the stationary or less rapidly moving ends of the magnet. The energy is being converted into potential energy as the shavings come closer to the magnet.