The correct option is C Happily
Adverbs modify a verb, adjective, determiner, clause, preposition, or sentence. Adverbs typically express manner, place, time, frequency, degree, level of certainty, etc., answering questions such as how?, in what way?, when?, where?, and to what extent.
Here, option C is correct as the adverb "happily" is modifying the verb 'smile' and indicates 'in a happy way'.
Options A, B and D are the different degrees of the adjective 'happy'. Adjectives describe or modify nouns or pronouns.