I don't know what the interviewers expect, but, generally, your "reward" for admitting you've seen the problem before is a harder question to answer. It seems more in the candidate's interest to pretend to work out the solution than to be honest.
It was at this point that I realized I have no chance of getting into FAANG when I'm playing low-level tactics like just trying to just solve two medium problems in <40 minutes with the most optimal answer. :( (Or 1 hard problem in 30-35 minutes)