How can I record system sounds (apps) in Audacity?

"There are a few ways to do this with Audacity (on Windows), but here are a couple of options:

Best quality:

In the first drop down menu (Audio Host) change the default setting from MME to Windows WASAPI.
In the second drop down menu (Recording Device) change the default setting from microphone to your output device (usually your speakers or headphones).

You will now be able to record whatever audio plays on your computer without picking up any distortion from your mic. Keep in mind if you have any sound alerts (such as message alert sounds etc.) it will pick up those as well.

Not as good quality, but better than mic/cable:

For those that cannot find Stereo Mix option in Audacity, it is likely because it is disabled by default in newer versions of Windows. You first need to enable it in Windows as follows:

Right-click the audio icon in your system tray (lower-right corner of Windows)
Select recording devices
If you see Stereo Mix and it is disabled, right-click on it to enable it.
If Audacity is currently open, close and re-open it so that it detects the new recording device.
In Audacity, you can now select Stereo Mix from the second drop down menu (Recording device)"