I like the idea, but because the computer cannot understand the text it is producing, it cannot compute plausable consequences from actions/situations - unless you tell the computer what is or is not possible beforehand. In other words it won't be entirely random.
That depends. You shouldn't worry about what words you will actually use on this stage; you should worry about what type of words you use. I mean, try to start at a really high level (such as the setting->event->climax->resolve plan, which splits the story into four big chunks) and then work down. Like a tree, you begin with the trunk and then work downwards with multiple branches until you eventually put down leaves.
I imagine you should not just store the word strings you plan to use, but also some other properties of words. Assuming you want to have build-ups and climaxes, you should give each word properties like what class of word it is (person name, verb, place, event, etc) and also give it a "goodness" value ranging between -1 and 1, where -1 means "really, really bad" and +1 means "totally awesome!". For instance, compare the words scent
- which one would you prefer to breathe in? Most words has a charge like that, but some have a stronger or weaker charge, and it can be positive and negative.
Typically, you can build up tension by applying multiple words of stronger and stronger charge when you're at the sentence construction stage (the bottom level) so it can be really powerful if used correctly.
Also, you could give words a "tension weight", that ranges between 0 and 1. The higher the tension weight, the more tension does the word create. This would be used in a similar way, to create build-ups.
So, if we agree that my method is good, we have an idea about where to start and we have an idea about where to end up... but the middle-levels, between the trunk and the leaves... we have no real idea about what to do there. I think the middle part is dependant about how long you want the average random story to be; if it's just one page, you could begin assigning sentences to the four parts at once; if it's longer you might have to divide it down to paragraph level or so before you start generating sentences.
One thing that springs to my mind for making more complicated novels... you could use a "event stack", and every now and then you may push a new event on the stack; to go on with resolving an event, all events pushed on top of it must be resolved first. If an event of higher "severity" is pushed on top of a low-severity event, the low-severity event will be destroyed immediately and left out once the high-severe event has been resolved (for instance, the protagonist is going over the street while carrying a hurt puppy and gets hit by a truck; when he awakes on the hospital the puppy is gone and the plot will never mention it again). If multiple events of equal severity is pushed on each other they should both be referenced until the top one is resolved; for instance if the protagonist is diving, gets low on air, gets trapped in a ship wreck, and gets chased by a shark inside the shipwreck, all these events basically take time simultaneously since they're all of maximal severity. The "environment severity" (highest severity in the stack right now) could be used to cut down low-severity events after few sentences; for instance if the hero finds a minor gold coin while escaping the shark, it's just briefly mentioned, if he finds a strange key it's briefly mentioned but not as briefly as the coin; if he finds a dead end there's a long account about it.
Also, there should be a limit to how many events you can stack. Finally, sometimes you can empty the stack completely. If that happens you should write a pretty comforting resolve passage and end the chapter. You can push on more events in the next chapter, if you want the plot to go on.