Three questions about a sudden ranking drop

Google guessing game

[vmills]

A site dropped from its #2 spot for its main keyword phrase--where it has been a fixture for about a year--to #13 last Friday (8/8) and traffic is down by 60%. Its a PR5 site, and the competitors for that phrase haven't changed (apart from a new spammy site now appearing as #4) nor has the site that dropped. I don't know why it dropped, so here are my three questions about what to do.

1) I've read several posts that say it's normal for Google results to suddenly go wacko. Is it really? If so, I should just sit tight and wait, right? even though money is being lost.

2) We bought (for a very small sum) a link on what appears to be a reputable PR6 directory site in the same field. It was the very next day that our site's ranking plummeted. Is this just a coincidence? I was under the impression that incoming links could not hurt a site's ranking.

3) The content of the site has not been changed in a year. Does Google penalize sites when their content does not change? (Ah, if only I could get a direct answer to that one!) Fresh content isn't really necessary for this service business site, which has been very successful at generating sales. I'm considering reworking the site anyway, just to see if the rankings will pick back up, but I thought Google was trying to promote the idea that you shouldn't have to change a site just to impress the search engines.

By the way, there's not a spec of spam on the site. It's all honest stuff.