It is apparent to the believer that Alma did indeed have the Spirit of God with him. He knew of the angel's declaration to Benjamin that the name of Christ's mother would be Mary (Mos 3:8), and was given to know the details of her immaculate conception. He must have wondered how a mortal could give birth to Jehovah. He learned through the Spirit that it would happen by the power of the Holy Ghost, and [she would] bring forth a son, yea, even the Son of God.
To the unbeliever, this verse is used to criticize the Book of Mormon. Everyone knows, they argue, that Jesus was not born in Jerusalem but in Bethlehem. Therefore, the Joseph Smith got it wrong and the whole Book of Mormon must be false. The explanation for this apparent incongruity is rather simple.
We must remember who the audience is for Alma's sermon. Since it was 517 years since Lehi left Jerusalem, it is doubtful that the people of Gideon knew much about the Old World geography. If they barely knew the location of Jerusalem, they are not going to know about the small town of Bethlehem located 6 miles to the south. An individual born in the suburbs of a well-known city will usually give the larger city as their place of origin, especially if their audience is unfamiliar with the smaller community. Similarly, it is in deference to his audience that Alma gives the name of the larger area. Alma's rendering of this phrase does not mean that neither he nor Joseph Smith knew that the Savior was born in Bethlehem. President Smith speaks to this attack on Alma 7:10.
Joseph Fielding Smith
"This question has in recent weeks come from several sources. It is from the promptings of enemies of the Church who spend their time in a futile endeavor to discredit the Book of Mormon, attempting to make it the product of the mind of Joseph Smith the Prophet or some other person in collusion with him. These religious persons who sponsor this question may well be compared to the scribes and Pharisees of old, and the Savior's description of them, as recorded in Matthew, Chapter 23, fits these modern Pharisees and scribes admirably. They attempt to show that the Book of Mormon is of modern authorship, and this attempt has been going on for one hundred and twenty-five years and is farther away from effectiveness than in the beginning. It has utterly failed.
"Joseph Smith and those associated with him when the Book of Mormon was translated knew perfectly well that Jesus was born in Bethlehem. If the Book of Mormon had been the production of the Prophet Joseph Smith, Sidney Rigdon, or anyone else connected with this restoration, it would have stated plainly that Jesus was born in Bethlehem, for they were well aware of this fact. There has been an effort to make it appear that the Prophet was a very ignorant man who did not know where Jesus was born. In this they display their bitterness and hate and add to their confusion, for an ignorant man unacquainted with the fact of the birth of Jesus Christ could not have written the Book of Mormon. The fact that it is written in Alma as it is, indicates plainly that it is an expression coming from the Hebrew; for this is purely a Hebrew expression, in full accord with their manner of speech.
"…There is no conflict or contradiction in the Book of Mormon with any truth recorded in the Bible. A careful reading of what Alma said will show that he had no intention of declaring that Jesus would be born in Jerusalem. Alma knew better. So did Joseph Smith and those who were associated with him in the bringing forth of the Book of Mormon. Had Alma said, 'born in Jerusalem, the city of our fathers,' it would have made all the difference in the world. Then we would have said he made an error. Alma made no mistake, and what he said is true.
"Dr. Hugh Nibley, in his course of study for the priesthood for 1957, An Approach to the Book of Mormon, in Lesson 8, page 85, has this to say on this point:
'. . . One of the favorite points of attack on the Book of Mormon has been the statement in Alma 7:10 that the Savior would be born 'at Jerusalem which is the land of our forefathers.' Here Jerusalem is not the city 'in the land of our forefathers,' it is the land. Christ was born in a village some six miles from the city of Jerusalem; it was not in the city, but it was in what we now know the ancients themselves designated as 'the land of Jerusalem.' Such a neat test of authenticity is not often found in ancient documents."
(Answers to Gospel Questions, vol. 1, pp. 173-5)
Hugh Nibley
"When we speak of Jerusalem, it is important to notice Nephi's preference for a non-Biblical expression, 'the land of Jerusalem' (1 Nephi 3:10), in designating his homeland. While he and his brothers always regard 'the land of Jerusalem' as their home, it is perfectly clear from a number of passages that 'the land of our father's inheritance' (1 Nephi 3:16) cannot possibly be within, or even very near, the city, even though Lehi had 'dwelt at Jerusalem in all his days' (1 Nephi 1:4). The terms seem confused, but they correctly reflect actual conditions, for in the Amarna letters we read of 'the land of Jerusalem' as an area larger than the city itself, and even learn in one instance that 'a city of the land of Jerusalem, Bet-Ninib, has been captured.' It was the rule in Palestine and Syria, as the same letters show, for a large area around a city and all the inhabitants of that area to bear the name of the city. This was a holdover from the times when the city and the land were a single political unit, comprising a city-state; when this was absorbed into a larger empire, the original identity was preserved, though it had lost its original political significance…This arrangement deserves mention because many have pointed to the statement of Alma 7:10 that the Savior would be born 'at Jerusalem which is the land of our forefathers,' as sure proof of fraud. It is rather the opposite, faithfully preserving the ancient terminology to describe a system which has only been recently rediscovered." (Lehi in the Desert, And the World of the Jaredites, pp. 6-7)