Step 1: Apply the inverse property:
Using the identity $AA^{-1} = I$, and given
\[
A^{-1} = \frac{1}{2} M,
\]
we get
\[
A \cdot \frac{1}{2}M = I \Rightarrow AM = 2I.
\]
Step 2: Compute the product $AM$:
Given
\[
A = \begin{pmatrix} 0 & 1 & 2 \\ 1 & 2 & 3 \\ 3 & x & 1 \end{pmatrix},
M = \begin{pmatrix} 1 & -1 & 1 \\ -8 & 6 & 2y \\ 5 & -3 & 1 \end{pmatrix},
\]
performing multiplication, we obtain
\[
AM =
\begin{pmatrix}
2 & 0 & 2y + 2 \\
0 & 2 & 4y + 4 \\
8 - 8x & 6x - 6 & 4 + 2xy
\end{pmatrix}.
\]
Step 3: Compare with $2I$:
Since
\[
2I = \begin{pmatrix} 2 & 0 & 0 \\ 0 & 2 & 0 \\ 0 & 0 & 2 \end{pmatrix},
\]
equating corresponding entries gives
\[
2y + 2 = 0 \Rightarrow y = -1,
\]
\[
8 - 8x = 0 \Rightarrow x = 1.
\]
Step 4: Verify remaining entries:
Substituting $x=1$ and $y=-1$:
\[
6x - 6 = 0, 4y + 4 = 0, 4 + 2xy = 2,
\]
which confirms consistency. Hence,
\[
(x, y) = (1, -1).
\]
Step 5: Final conclusion:
Thus, the values of $x$ and $y$ are $(1, -1)$, which corresponds to the correct option.