1. a CAD is financed through a capital and financial account surplus, that is correct, but you do need to look at it in a more specific way. I think that the best option is to focus on the primary incomes account as it is the main cause of Australia's CAD. This can be financed through:
Foreign loans
taking out foreign loans (this is recorded as a credit on the financial account, however we must be careful of this more loans are going to lead to increased debt servicing costs which means the CAD has the potential to get higher, and this can build up into a cycle known as the 'debt trap' - it is important to avoid this that the foreign banks manage risk appropriately and only lend when they are very likely to get a return)
Domestic equity
Giving away domestic equity domestic equity is another way to finance the CAD. This may sound a bit confusing but in reality what it means is when foreigners are investing in the stock market or buying property etc. - the money that they put into Australia for this helps to finance the CAD
2.
There are heaps of effects, you really just need to think more deeply about the components of it
direct subtraction from economic growth
firstly, when there is a BOGS deficit (import are greater then imports) this directly detracts from economic growth because a component of economic growth is exports - imports (X - M)
Can dampen foreign confidence
If there this a very high CAD, say around like 5+ % of GDP, this can lead to 'capital flight' where investors are unsure about the stability of the economy and so they move there money out of there. Mainly occurs if the investors think they won't get a return on their investment, but foreign investors are still confident because of the fundamentals of our economy (interest rates, GDP growth, unemployment) which we are doing very well in compared to other advanced economies such as the US and the growth of things such as the mining section that the will be able to get a a good return on their investment so this effect is minimal on us right now.
the BOP policy constraints
In extreme circumstances a high CAD may cause a reduction in growth because of a shifted government policy focus (policies designed to lower foreign investment and subsequently lower our debt servicing costs and also try to lower the amount of imports). Normally the government doesn't really worry much about the CAD - they don't even have a target range - but in extreme circumstances they may start to worry about it and implement specific policies to help, which may slow down economic growth. This constraint occurred in the 1980s due to the very high CAD and very high world interest rates meaning it was costing us a lot to service our liabilities. Hasn't really happened since because global interest rates are so low that servicing our liabilities is unlikely to be much of a problem.
Another approach to Q2
Instead of doing the three things above, you may be better off speaking about it in terms of an increase in CAD can mean more imports or less exports which effects trade and then link that to the first point, then start speaking about the primary incomes account and how we have to service our foreign liabilities and how this can effect economic growth in terms of investors withdrawing money if they believe our economy is getting unstable and then if the CAD gets really bad the government may have to implement contractionary policy which slows growth to deal with it.
And also again you could take another approach and speak about the positives / negatives and dangers and stuff and speaking about the Pitchford theory (google it) and how a high CAD can be a driving factor for economic growth because it means more foreign investment (Australia's mining sector wouldn't have been able to growth without this) and how the foreign investment helps to make up the the savings-investment gap (which has decreased in recent years though as the GFC was a catalyst to trigger changes in peoples spending habits)
Hope this helps
And sorry if something doesn't make sense, please ask me and I will clarify it. I've tried to type it up pretty fast so my thoughts may be a bit bungled.
