Soundflower and Audacity for Recording Audio

Using Soundflower and Audacity to Record Audio from Computer 

Soundflower is an OS X extension that allows applications to move/pass audio to other applications. (Warning, Apple does NOT recommend this app for Mac OS X 10.8)

Once Soundflower is installed, you need to change settings in the preferences of both Audacity and the Mac system as follows: 

Audacity:

Open Audacity, go into Preferences>Devices

Audio I/O:
            Host: Core Audio
            Playback: Soundflower (2ch)
            Recording: Soundflower (2ch), Channels: 2(stereo)

MAC:

Apple System Preferences > Sound

Set Input: Soundflower (2ch); Output: Soundflower (2ch)

Start playing something (try a Youtube, for example), hit record in Audacity.

When finished recording, go back into Apple System Prefences > Sound and Audacity Preferences > Audio I/O to reverse settings.