Assuming you are using Windows 7 (I think however it was similar in XP): Go to Control Panel, Sound, Recording tab, then right-click and you will get a menu where you can check Show Disabled Devices. (If I am not mistaken Stereo Mix was enabled by default in XP, but I read that Microsoft disabled it by default after that under pressure from the music industry, to discourage direct recording....)
This should enable Stereo Mix to be displayed in the Recording tab. The default settings should be fine, but you can also then use the right-click menu with Stereo Mix to display its Properties, where you can carry out any tweaks (including the output volume, which may need to be adjusted for best recording results).
Audacity itself can regulate input and output volume to a certain extent. You then also need to be sure that Audacity's Preferences are set for Stereo Mix input, not microphone etc.