Final answer:
A significant rise in the price of oil is likely to lead to increased inflation and decreased employment, a condition known as stagflation that was notably observed in the 1970s.
Step-by-step explanation:
A significant, sustained increase in the worldwide price of a barrel of oil can generally lead to increased inflation and decreased employment. This economic condition is often referred to as stagflation, a term that became popular in the 1970s when major economies like that of the United States experienced such a scenario. The rise in oil prices acts as a shock to the supply side of the economy, leading to higher production costs for many industries, which can result in higher consumer prices (inflation), and potentially reduced demand for goods and services. Companies might lay off workers to cut costs, leading to higher unemployment.
The correct answer to the student's question is 1) increased inflation and decreased employment. Historical examples such as the recessions in the 1970s and early 1980s show that rises in oil prices can precede economic downturns, characterized by a reduction in the short-run aggregate supply (SRAS) within the economy, leading to lower output and higher prices simultaneously.