It is a baby blue rotating display that consists of several baby dolls.
Role in the episode
After SpongeBob and Patrick get permanent paint on Mr. Krabs' First Dollar, they are scared for their lives and do their best to remove it or hide the evidence, which doesn't work. Mr. Krabs later comes home from the grocery store and thinks the pair "have a dirty little secret." He takes a look around and thanks them for their hard work, however, he then overreacts upon witnessing that they messed up his Doll-a-Rama by misplacing one of the dolls, so he places said doll back in its correct position, resulting in it saying "mama" when Krabs touches it.
The way that Mr. Krabs reacts by taking a pause in between the second syllable in "Doll-a-Rama" makes SpongeBob and Patrick anxious, believing that he found out what happened to his first dollar, which he didn't. However, he eventually does when bumping into a bunch of portraits stacked in front of the dollar to hide the evidence, only for him to lick the paint off and inform the pair that it isn't actually permanent.