It is well known that shape corrections have to be applied to the local-density (LDA) and generalized gradient (GGA) approximations to the Kohn-Sham exchange-correlation potential in order to obtain reliable response properties in time dependent density functional theory calculations. Here we demonstrate that it is an oversimplified view that these shape corrections concern primarily the asymptotic part of the potential, and that they affect only Rydberg type transitions. The performance is assessed of two shape-corrected Kohn-Sham potentials, the gradient-regulated asymptotic connection procedure applied to the Becke-Perdew potential (BP-GRAC) and the statistical averaging of (model) orbital potentials (SAOP), versus LDA and GGA potentials, in molecular response calculations of the static average polarizability alpha, the Cauchy coefficient S-4, and the static average hyperpolarizability beta. The nature of the distortions of the LDA/GGA potentials is highlighted and it is shown that they introduce many spurious excited states at too low energy which may mix with valence excited states, resulting in wrong excited state compositions. They also lead to wrong oscillator strengths and thus to a wrong spectral structure of properties like the polarizability. LDA, Becke-Lee-Yang-Parr (BLYP), and Becke-Perdew (BP) characteristically underestimate contributions to alpha and S-4 from bound Rydberg-type states and overestimate those from the continuum. Cancellation of the errors in these contributions occasionally produces fortuitously good results. The distortions of the LDA, BLYP, and BP spectra are related to the deficiencies of the LDA/GGA potentials in both the bulk and outer molecular regions. In contrast, both SAOP and BP-GRAC potentials produce high quality polarizabilities for 21 molecules and also reliable Cauchy moments and hyperpolarizabilities for the selected molecules. The analysis for the N-2 molecule shows, that both SAOP and BP-GRAC yield reliable energies omega(i) and oscillator strengths f(i) of individual excitations, so that they reproduce well the spectral structure of alpha and S-4.(C) 2002 American Institute of Physics.