Hi Jennifer,
you need to edit the index.php file of your template.
Moreover, the jQuery library files need to be located at the root of the template. I would suggest you modify your script code because you may run into issues later on (you cannot keep $(function()...). Use jQuery(function($)...). You will need to make sure your libraries work with MooTools under the Joomla! environment. jQuery Easy can help you to do that, in which case it will limit your manual edits (and place the jQuery libraries at the right place in your template automatically).
To summarize: your site works fine as it is because you are not in Joomla!. When you add it into a Joomla! template, it conflicts with MooTools because MooTools and jQuery both use the '$' symbol. So you need to modify your code to avoid that. Follow the links on the jQuery Easy download page for more explanations
Good luck!