The audio itself won't be the problem. Look at the size of the apps your are using and a typical track - or even an album. Even together they will be tiny compared to the amount of memory you already have.
However, your OS might need more RAM than you have to be "snappy". You say you have "Snow Lion"? Don't you mean "Mountain Lion" or "Snow Leopard"? For the former, most people tend to go for 4GB RAM. You won't get better sound quality, but you should lose most of the sluggishness.
Or you could say "To Hell with iTune" and run one of the lighweight Linux distros suitable for that machine. Or even sell the machine, which would pay for something like a Shuttle XS35, which burns only 20W instead of 80, and using a suitable Linux (say Xubuntu) most certainly would not be sluggish as a music server. MacOS is a bad choice for the way you are using it because it has become so heavyweight that it requires fairly heavy resources even when it is doing nothing.