After you tell Toad what happened and learn about the Smithy Gang, Toad tells you to travel through Mushroom Way to talk to the Chancellor.
Travel Through Mushroom Way
Since you will be battling several enemies in this area, you might level up. Whenever you level up, you can choose a level up bonus. You can preview which stat will increase, and how much it will increase, before you make your final choice. As you play, you will get a feel for each characters strengths and weaknesses, and you can pick your level up bonuses based on what you want to improve.
In the Nintendo Switch Version, when you have filled your Gauge (by doing timed hits and timed dodges), you can press - to perform your Gauge Move. Mario's Gauge Move is Toad Assist, where you can press the jump button to hit a chest and get a random bonus.
In the first part of Mushroom Way, there is a constant stream of Goombas going from the far exit toward Mario's Pad. You can battle them or ignore them.
Farther ahead, there is a floating treasure box. There is a Koopa (Paratroopa in the Nintendo Switch version) flying back and forth beneath the treasure box. You can battle the Koopa or dodge it. Then stand under the treasure box and jump repeatedly to get all the coins from the treasure box.
Beyond that, there is another Koopa flying around, and another treasure box. Nearby, Toad is trapped by a Goomba. You can ignore it, but if you battle it, Toad gives you a Honey Syrup. Save this item for later. You can use it to restore 10 Flower Points. Flower Points are what you spend to use Special attacks. Go northeast to the next area.
There is a Goomba hiding behind the trees to the northwest. It will rush forward to try to attack. Also in this area, a Koopa will keep flying toward you. You can ignore it or battle it. There is also a Goomba on a spinning flower. When you approach the flower, a hidden Goomba will rush forward from behind the hill.
If you defeat the Goomba on the spinning flower, you can land on the flower, then press the jump button to be launched in the direction that you are facing. Do this to reach the west platform, where there is a treasure chest with a Flower inside. The Flower will increase your maximum Flower Points by one.
If you want to get two experience points (and a Pick Me Up in the Nintendo Switch version), use the spinning flower to jump to the northern platform. While there, you can fight the hidden Goomba that attacks you there.
You can optionally get a Flower Tab, which is an item that goes into your inventory, and if you use it, it will increase your Flower Points by one. To get the Flower Tab, use the spinning flower to jump to the east platform, then stand beneath Toad and jump up to battle the Koopa. Koopas are much weaker to Mario's Jump than to his regular attacks. Toad will give you the Flower Tab after the battle.
Go east and you will see another treasure box, but there is another hidden Goomba that will attack when you walk under the treasure box, so watch out. The treasure box contains a healing mushroom, which instantly restores all of your HP and FP (it doesn't go into your inventory).
Go southeast to the next area. There is a Lakitu in the area that drops Spikeys. The Spikeys will follow you around. There are also some hidden Spikeys in the area that will rush out to attack when you go near.
Go east, and after some dialogue, approach the boss and you will have to battle the Hammer Bros.