You can indeed populate large areas with grass or other vegetation using shapefiles, however I would strongly recommend using it sparingly for performance reasons. It's hard to even see the grass models until you are close to them anyway so a good approach is to mix 3D grass with grass materials.
You may find using a custom multiscale grass materials more realistic for your scene (see below). I have modified a copy of the existing multiscale grass with Photoshop to match my scenes more closely. You can find a tutorial online somewhere. Note that in the image above I have used a multiscale grass material AND the built in 3D grass models.
When I setup grass/vegetation, I import and set the Type as Trees. The first thing I do is go to the Table tab (in the Data Source Configuration Dialogue box) and set the object spacing to something sensible. If you overlook this it looks like there's nothing in the shapefile's extents! Next I set the Object Spacing Variance to randomize the spacing.
Cheers,
Steve