The correct response is:
Potential energy transfers to kinetic energy, then some kinetic energy transfers to potential energy.
As the model roller coaster moves from point X to point Y, it converts its potential energy (when at a height) into kinetic energy (as it speeds up), and as it moves up again or encounters resistance (e.g., friction), some of that kinetic energy may be transformed back into potential energy or thermal energy due to energy losses like heat.